In the current economic climate, more and more companies are becoming financially distressed. Directors are duty bound to constantly monitor the company’s financial position, to determine whether voluntary business rescue proceedings need to be initiated. Failure to implement business rescue proceedings could result in the director being charged with reckless trading and be exposed to personal liability. It is incumbent upon directors to ensure that they place their companies into either business rescue or liquidation, or to cease trading, when the warning signs become evident. Directors should be aware of the practicalities of business rescue, and the duties and powers of the business rescue practitioner.
Where the director has reasonable grounds to believe that:
- The company is financially distressed, and
- There is a reasonable prospect of rescuing the company
Business rescue proceedings must be initiated by the directors by board resolution. Such resolution must be filed with the Commission before it is of any force or effect and may not be adopted if liquidation proceedings have already been initiated against the company.
If a company is financially distressed and directors decide not to place it into business rescue, the directors will be under a statutory obligation 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.
The ‘Business Rescue’ clause in the Companies Act 71 of 2008, also applies to CC’s.