Since the new Companies Act No. 71 of 2008 (the act) came into effect, on 1 May this year, the duties and potential liability faced by company directors have increased.

Prior to this, the behaviour of company directors was governed by common law, which dictated that directors act in the utmost good faith and in the best interests of their companies; and included the need to exercise care, skill and diligence to promote company success.

The act now codifies the common law position, lists specific statutory duties and details all circumstances in which directors and prescribed officers may be exposed to personal liability.

Directors and prescribed officers need to be particularly aware of the circumstances in which they could be held personally liable for the debts of a company if it is placed into liquidation. 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.

Business rescue is introduced in Chapter 6 of the act and effectively replaces the judicial management provisions of the old Companies Act No. 61 of 1973.

Business rescue involves proceedings to facilitate the rehabilitation of a company that is financially distressed. This is done through the temporary supervision of the company's affairs as well as a temporary moratorium on the rights of creditors.

The business rescue process culminates in the development and implementation of an approved plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity.

The business rescue plan's objective is to maximise the likelihood of the company continuing in existence on a solvent basis. If this is not possible, the implementation of a business rescue plan should result in a better return for creditors or shareholders than would result from the immediate liquidation of the company.

Worldwide, directors' duties to their companies are being elevated to ensure that correct decisions are made for the financial benefit of companies at all times. Failure to maintain a particular level of knowledge of these issues can result in directors being severely criticised or being held liable for company debts as a result of reckless and negligent behaviour.

Directors therefore need to be aware of the increased obligations and potential exposure to personal liability set out in the act. They should also consider the level of insurance required to provide cover for potential claims.

Contact:

Dave Walker, director
Direct line: +27 (0)11 535 8207
Email: dwalker@werksmans.com

Eric Levenstein, director
Direct line: +27 (0)11 535 8237
Email: elevenstein@werksmans.com

Louis du Preez, director
Direct line: +27 (0)21 405 5140
Email: ldupreez@werksmans.com

Paul Winer, director
Direct line: +27 (0)11 535 8211
Email: pwiner@werksmans.com

Walid Brown, director
Direct line: +27 (0)21 405 5245
Email: wbrown@werksmans.com

Lynsey Watson, associate
Direct line: +27 (0)11 535 8312
Email: lwatson@werksmans.com