Insolvency Practitioners: Insolvencies in South Africa During Lockdown
With an increase in insolvencies in South Africa, more and more businesses approach insolvency practitioners for advice on how to proceed with business rescue and liquidation applications for their companies.
Hope During This Period?
For companies struggling to maintain cash-flow, pay their creditors, and ensure their liabilities do not exceed their assets, there is hope. The Companies and Intellectual Property Commission, better known as CIPC, issued Practice Note GNR 351 on 24 March 2020, just before the commencement of the national state of disaster as stipulated by the Disaster Management Act of 2002. Accordingly, the CIPC stated that it will not carry out its powers according to the Companies Act of 2002, Section 22.
The CIPC is empowered to issue a notice to a company that it must stop trading if the CIPC has reasonable grounds to believe that the company is not able to pay debts when due during the normal course of trade or is trading recklessly with gross negligence with the aim of committing fraud.
In such an instance, the CIPC can issue a notice to the company in question, giving the company the opportunity to state why it should be allowed to trade. The company must show sufficient cause to trade within 20 days from receiving the notice.
If not done, the CIPC can then issue the notice that the company must stop trade. The Practice Note, as issued, is only relevant to the section as it relates to companies unable to pay debts when due during the normal course of doing business. For more information on the notice and the interpretation thereof, it is recommended to consult with our insolvency practitioners, who are well acquainted with the proceedings for insolvencies in South Africa.
The Practice Note does provide a level of respite for companies struggling to pay debts during the normal cause of business as the result of not being able to operate at full capacity during the state of disaster period.
Such businesses thus get the opportunity for restructuring and trading to become solvent again. This may be difficult for many companies, especially businesses operating within the supply chains in the entertainment, hospitality, tourism, tobacco, and alcohol provision industries.
With regulations still tight regarding trade in these industries, even the grace period may not be enough to prevent them from becoming part of the many insolvencies in South Africa. Business rescue may be a viable alternative for some, and, to this end, we recommend consulting with our insolvency practitioners to determine whether or not business rescue is a viable option for the specific company.
Company owners should be careful not to misunderstand the Practice Note since the inability of a company to pay debts when due in the normal course of trade is not the same as that relating to the test for solvency as applied in section 46 of the Act.
The section, as can be explained in more detail by our insolvency practitioners, states that the business entity must perform the test of solvency with distribution. It must thus be satisfied that it will be able to pay debts when due in the course of trade for a period of twelve months after the distribution or test.
If your company is not able to do so, it is best to seek legal guidance from our insolvency practitioners regarding business rescue or liquidation proceedings.
The Practice Note also does not affect the right of CIPC to invoke its powers where a company carries on trading recklessly and with gross negligence for fraudulent purposes. It also does not affect companies experiencing temporary insolvency as the result of circumstances or causes not related to the national state of disaster. The CIPC can thus still issue notices to stop trading for such insolvencies in South Africa.
What About the Rights of Third Parties?
Third parties may still take legal action against the company and its directors for contravention of the Companies Act for damages suffered as the result.
If your company has suffered losses because of the non-performance on payments by a client company, and you have reason to believe that the company is not able to pay its debts when due during the normal course of business, consult with our insolvency practitioners regarding the legal steps to take.
What About the Personal Liability of Directors?
Directors of companies do not seem to be safe from the right of the company for a claim against the directors for losses as the result of them conducting trade, knowing that the trade is not allowed according to section 22(1) of the Act. To this end, we also recommend consulting with our insolvency practitioners as to whether or not the directors of your company are protected or can be held liable for contravention of a section of the Act.
What Is the Duration for Practice Note Regulations?
The provisions stay in place for the entire period of the national state of disaster and another 60 days after it ends.
Role of Insolvency Practitioners
Insolvency practitioners work mainly with companies, close corporations, and individuals unable to pay their debts and where the liabilities exceed the assets. Such insolvency practitioners also provide legal help for parties in debt collection via liquidations and sequestrations against parties that are insolvent and thus unable to pay their debts. They furthermore assist with business rescue operations.
Can a Company Be Liquidated by A Court Order for Reasons Other Than Insolvency?
Yes. Where the directors of a company commence with business before the company has been issued with a registration certificate by CIPC, the court can order that it must be liquidated.
The court can also order winding up of a company if it fails to commence with business within a year after registering its incorporation at CIPC.
Where a company suspends business operations for an entire year, the court can also order it to be liquidated.
In the instance of a public company, the court may order it to be liquidated if it has fewer than seven members.
The court may order the dissolution of an external company if it has stopped trading or it has been dissolved in the country of incorporation.
There are more circumstances under which the court can order the winding up of a company, best discussed with our insolvency practitioners.
How it Affects Your Company
You may have registered a company just before the national state of disaster and lockdown commenced. With the regulations in place, you may not have been able to trade. Even if the lockdown regulations change to allow for your business to trade, it may still not be able to do so because of cash-flow issues as the result of the long non-trade period.
You may end up not having traded for an entire year or not having the capital left to get operations up and running within the one-year period. To this end, consult with our insolvency practitioners as to the least expensive and fastest way to dissolve the company.
Liquidation may also be necessary if you have incurred considerable debts just before the lockdown period without the ability to pay such because of not being able to trade. We strongly recommend seeking legal guidance from our insolvency practitioners as to the correct course of action to limit your liabilities and minimise damages.
Conclusion: Help is Available
We live in unprecedented times. The inability to trade, loss of income because of the inability to get stock and more, are just two of many reasons for current business insolvencies in South Africa.
Rather than assuming your company and the directors are protected under the Practice Note, seek legal guidance from our insolvency practitioners. We can help you determine the best course of action if your company is unable to pay debts when due or likely not to be able to pay such when due within the next twelve months.
Disclaimer: This article is for information purposes only and does not constitute legal advice. Call on our attorneys rather than relying on the information herein to make any decisions. The information is relevant to the date of publishing.