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CGF ARTICLES, OPINIONS & EDITORIALS

Directors beware: There’s a new meaning to Business Rescue (2011-06-27)

All too often, the dream of setting up a company and establishing a business is rushed into by zealous individuals, eager to make a quick profit. 

Many self appointed, unqualified directors fail to ensure the business is grounded upon sound governance principals, and are often oblivious to the lurking legal requirements that protect the company as an entity, as well as the stakeholders who become involved in the company’s business.

Directors who establish businesses in this haphazard manner ought to be reminded of the fact that there are a number of legal mechanisms that protect the rights of the company (the juristic entity), but there is little, if any, protection afforded to those who set up the company, and run its daily operations.  The juristic entity is afforded the right -- through common law, legislation and the company’s constitutional documents -- to be protected by the people charged with this duty, and who are now referred to as prescribed officers in the new Companies Act 2008 (the Act). 

Rather ironically, many of the prescribed officers, who consist of the company’s directors and its senior management, are not able to articulate what is expected of them in terms of their common law duties, which include the duty to act honestly, diligently and in the best interests of the company at all times.  Moreover, their duties also extend to complying with all applicable law, acting with independence, but also notifying the company’s stakeholders should there be any concern that the company may be in financial distress.  For these errant directors, one would hope that they will rapidly rethink and change the nature of their reckless behaviour, which so often causes devastating financial losses to the company’s shareholders, employees and creditors.

Fortunately, the legislation appears to be tightening its grips to control the actions of those company’s directors   whose imprudent actions and blasé attitudes result in financial distress to the company and all concerned.

Directors on the boards of South African companies are now legally bound to follow specific guidelines, as well as deliver a written notice to each of its affected stakeholders informing them that the company is in financial distress, as a result of Chapter Six and Section 129 of the Act -- which became effective on 01 May 2011 -- including those recommendations of the King III Report on Governance 2009 (King III).  Business rescue proceedings may be initiated either by an ordinary company resolution or failing this, a court order may be issued for the proceedings to begin.  More reassuring is the fact that if directors vote for a resolution for a business rescue, and it becomes evident that this was indeed not necessary, the directors of the company will be penalised.

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