In a speech in Cape Town in June 1966, Robert Kennedy said:
There is a Chinese curse which says; 'May he live in interesting times.' Like it or not we live in interesting times. They are times of danger and uncertainty.
As those who lived through the 1960s (and can remember) will recall, they were nothing if not interesting.
Most companies today face a tremendous backlog of debt and naturally as any bona fide Director would like to think, “things will get better”. This isn’t always the case especially with the recent downgrading of South Africa’s financial status once more and the looming financial crisis to come because of the Covid-19 pandemic. The South African economy is going to be placed under considerable pressure in the months ahead and business owners are going to feel the pinch more than ever.
It is not always possible to fund a business through Director’s or Shareholders Loans, nor will it be likely that Financial institutions, will assist with new loans. This inevitably fact can lead to serious cash flow issues resulting in non-payment of debtors, salaries and even SARS.
Many of the companies that Francois Uys Inc deal with are in this untenable position. Company executives are not always informed enough to know that a business may be voluntary liquidated to the benefit of their creditors and staff alike. The stigma associated with the word liquidation is one that is widely spread in the media as one associated with fraud and corruption. SAA too has been a victim of such media articles in the recent weeks.
DIRECTORS need to keep a careful watch on the financial status of their companies and make sure they are not trading in insolvent circumstances as this could constitute a criminal offence.
When directors analyse the state of the economy, together with the financial crisis being experienced, it is evident that directors will need to keep careful watch with regards to the financial status of their companies, particularly when one considers whether or not a company is trading in insolvent circumstances.
Directors need to be aware of the circumstances in which they can be held personally liable for the debts of the company should such (entity) be placed into liquidation after having traded in Insolvent circumstances. The following is not exhaustive but the most common infringes:
Directors are obligated to report financial distress – failure to do so might result in personal liability.
- Reckless trading
Reckless trading and conducting the company’s business with the intention of defrauding creditors are dealt with in the Companies Act of 2008. ( Still commonly called “new Act”)
Section 22(1) states that a company must not carry on its business recklessly, with gross negligence, with intent to defraud any person, or for any fraudulent purpose.
Section 77(3)(b) states that any director of a company is liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the director.
The onus lies with directors to ensure that when the warning signs become self-evident, that they immediately take legal and financial advice and, if necessary, place their companies into liquidation, Business rescue or cease trading.
Consequently a director would have a duty to pass a resolution for a company’s business rescue or alternatively, resolve to wind up or liquidate the company as soon as he or she becomes knowingly aware that the company is either financially distressed or is trading in insolvent circumstances (both factually, in that its liabilities exceed its assets, or commercially, in that it cannot pay its debts to creditors as and when they fall due).
- Financial distress
The definition of financial distress in reference to a particular company at any particular time, means that:
- it appears to be reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable within the immediately ensuring six months; or
- it appears to be reasonably likely that the company will become insolvent within the immediately ensuring six months.
If a company is financially distressed and directors decide not to place it into business rescue, directors will be under a statutory obligation, in terms of section 129(7), to deliver a written notice to each affected person, confirming that the company is financially distressed and is not being placed into business rescue and providing reasons for this decision.
Section 129(7) of the Act provides that:
''[I]f the board of a company has reasonable grounds to believe that the company is financially distressed, but the board has not adopted a resolution contemplated in this section, the board must deliver a written notice to each affected person, setting out the criteria referred to in section 128(1)(f) that are applicable to the company, and its reasons for not adopting a resolution contemplated in this section” (our emphasis).
With a section 129(7) notice, a company effectively publicises to the outside world (including creditors) that notwithstanding its inability to pay its debts in the ensuing six months or the possibility that it will become insolvent in the ensuing six months, it believes, for the reasons delineated in the notice, that it is not necessary to pass a resolution for the commencement of business rescue.
Careful consideration should be given when sending out this notice as it may give rise to unintended consequences (potentially an “Act of Insolvency”). A creditor receiving such a notification might itself apply to wind up the debtor company on the basis that such company cannot pay its debts and/or is insolvent on its' balance sheet.
Thus, if a board concludes that the company is “financially distressed”, it will be obliged to either;
- adopt a resolution in accordance with the provisions of section 129(1) of Act to place the company under business rescue; or
- deliver a written notice to each affected person (in accordance with the provisions of section 129(7) of the Act) advising each affected person as to the reasons why the requisite resolution was not adopted.
Early signs of a "looming insolvency" would be things such as cash flow problems, a balance sheet showing liabilities in excess of the company's assets and an inability of the part of the company to pay its debts as and when they fall due. Other warning signs are continuing trading losses, a net asset deficiency, a continued failure to meet tax commitments, and delayed payment to essential and nonessential creditors.
At Francois Uys Inc. Attorneys we first do a financial assessment of the entity in order to understand the business and to properly advise our clients of all their legal possibilities. We firmly believe it prudent to first try and rescue the business as liquidation is a last resort.
The process of Voluntary Liquidation does not have to be a High Court process which could be very costly and time consuming. While the High Court procedure is one of the ways to liquidate a company it certainly isn’t the only way. Each entity’s circumstances differ and therefore as the saying goes “One shoe does not fit all”. In most instances the Director/Member of a company/CC will liquidate the entity voluntarily.
The Companies and Intellectual Properties Commission (CIPC) allows for entities, where there is no dispute between Directors/Members/Shareholders, to apply for the voluntary liquidation of such entity if the following criteria are met:
- A CM100, statement of affairs is signed setting out the company’s current position financially by indicating who its creditors are and how much is due to each, what assets (if any) are owned by the company and the value associated to each item as well as the debtors of the company who are indebted to the entity.
- A CM25 resolution confirming the date of the meeting held and the signatories thereto.
- A CM26 resolution confirming in terms of which Act of law the application is made.
- The audited financial statements of the company as needed by the attorney.
- All FICA requirements to be met as required by the attorney.
Once the above is received the attorney will process the documents and submit accordingly to CIPC who will then change the company’s status from “in business” to “voluntary liquidation”. CIPC will then send the attorney updated company registration documents along with a “CM26LIQ” document confirming the company’s new liquidation status. CIPC has a turnaround time of 3-7 working days to process the order.
The order obtained through resolution (CIPC) or Court Order shall now follow the same winding up procedures i.e. the appointment of a Liquidator, by the Master of the High Court, to administer the winding up of the insolvent estate of the company. This is in its own no small task and is deserving of its own article to follow in due course.
For further information visit: WWW.UYSINCORP.CO.ZA