The New Companies Act (Act 71 of 2008 and referred to here as “the Act”), confers certain duties (and corresponding liabilities) on a Director of a Company that is in financial distress (the old Companies Act conferred no such obligations on Directors). As a layperson, all this legislation may be overwhelming, but they have to be considered given the important implications for a Director, particularly in the case of liquidating a Company. It is important to remember that a Director can, in certain circumstances, become liable for the business’ debts upon liquidation.
It is therefore always a good idea to consult a liquidation specialist so that they can assist in wading through any complicated legislation and advise of the implications for Directors on liquidation.
Section 76 of the Act States That a Director Must –
- act in good faith and for a proper purpose;
- in the best interests of the Company; and
- with a degree of care, skill and diligence, having the general knowledge, skill and experience that may be reasonably expected of a person carrying out the functions in relation to the Company as a Director.
Further, in terms of Section 77, a 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 agreeing to carry on the Company business despite that Director knowing carrying on of such business would be reckless, grossly negligent or intended to defraud any person (or creditor). Section 22 of the Act states that a Company must not carry on its business recklessly, with gross negligence, or with intent to defraud any person or for any fraudulent purpose.
In terms of Section 129 of the Act, if a Director has reasonable grounds to believe that the Company is in financial distress, they must (our emphasis) place the Company under Business Rescue, or liquidate the Company or send a notice to all shareholders, creditors, employees and trade unions that the Company is in financial distress and give reasons why the Company has not been placed under Business Rescue or liquidated. To not do any of this is a criminal offence. Directors can no longer ignore the financial distress of their Company or wait and see what happens. They have to act!
It must always be remembered that a Director also has a statutory responsibility to assist the liquidator at all times in the exercising of the liquidator’s duties in winding up the Company. This is a fiduciary duty and cannot be ignored.