Distress & Restructuring: Directors' Duties and Options

Responsibilities of Directors

Directors have certain fiduciary duties and responsibilities, including to act in good faith about the interests of the company and honestly about the conduct of the affairs of the company.

A director should also be aware that in circumstances where it is deemed that the company has traded in a reckless and fraudulent manner while insolvent, that the director can be made personally liable for the debts of the company.

In these challenging times, it is essential to ensure that all material business decisions are documented, at board meetings if possible, to demonstrate good faith, reasonableness and sound judgement in continuing to trade the company.  

Key challenges which companies will face over the coming months include:

• Maintaining cashflows to pay staff and creditors as they fall due
• Ability to perform contractual obligations to customers, suppliers, financial institutions and SARS etc.
• Will debtors continue to pay on time or potentially not be recoverable
• Does your business remain viable if there is reduced trade for a protracted period - at what point are you insolvent or ought to have been aware you were insolvent?
• Protecting staff, customers and the public from infection as well as other hazards 
• Loss of key personnel due to illness

Concerned About Your Company

There are many actions you can take if you are concerned your business will struggle to survive the current situation:

• Review your cost base to see if it can be adjusted to meet current activity levels
• Can you seek emergency funding if you believe the business is ultimately viable?
• Subject to proper procedure and consultation, reduce staff numbers or pay scales
• Engage with your financial institution and landlord about possible payment “holidays” or other temporary relief from payment obligations
• Engage with your creditors and seek to restructure repayments
• Assess what tax relief measures for which your business may be eligible

Formal Restructuring Options

If you believe there is no prospect of your business being viable during the current crisis or even once we emerge from it, you may need to consider whether a formal insolvency procedure is appropriate.

There are, however, options if you believe that your business is viable in the medium-term. Still, the coming months may see it accumulating liabilities which will impact on its ability to continue once we emerge from the COVID-19 crisis. These options include:

Business Rescue

Business rescue proceedings allows the company to enter a process whereby a business rescue practitioner is appointed to assume management control of the company and, in time, develop a proposed business rescue plan for consideration by its creditors.

Under this option, the business rescue practitioner, together with the company and identified stakeholders, prepares a proposal to its creditors setting out the manner in which the company may be rescued.  This usually includes a compromise of the company’s liabilities to its creditors pre-commencement of the business rescue proceedings.  A meeting of the creditors is convened to review and discuss the same and, if appropriate, to vote the proposed plan.

If 75% of creditors of the company vote in favour of the proposed plan (of which, 50% are required to be independent creditors), it is adopted and the business rescue practitioner is obliged to implement the plan.

Advantages of business rescue include

• A moratorium on all enforcement proceedings in respect of pre-commencement liabilities
• Possible compromise of debts
• The company may continue to trade, and liquidation is avoided
• It is legally binding on all creditors irrespective of whether or not they voted in favour of the adoption of the plan

Informal Turnaround

Informal turnaround is a process whereby the company assesses its operational and financial position, identifies remedial action and thereafter engages with its key stakeholders with a view to implementing identified changes so as to give effect thereto.

As it is not a formal process, informal turnaround allows a company considerable latitude as to how the turnaround is affected and with whom the company engages in this regard.  However, as it is not a formal process, there is no moratorium on legal proceedings or enforcement action which requires a company to secure a high degree of “buy in” with its stakeholders from the outset in order to restore the company to financial health.

 Advantages of Informal Turnaround include:

• Flexibility
• Retention of brand value or market perception
• May include a compromise of debts or agreed debt repayment “holidays”

General Considerations

• Review critical contracts with suppliers, customers, employees etc. to see if they contain force majeure clauses that may impact on your business strategy 
• Does your insurance cover include business interruption and if so, what are the specific terms and conditions surrounding the same? We recommend that you discuss this directly with your insurance broker

Are you a personal guarantor for any of the commitments and liabilities of the company - understand these implications as neither liquidation, nor business rescue remove exposures under personal guarantees (informal turnaround may not trigger this exposure, depending on how it is structured)