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Business rescue: Your duties as a director when a company is financially distressed

by , 11 March 2014
When it comes to business rescue, you'll hear words like 'financially distressed'. Read on to find out what this means and the duties of directors and members when companies or Close Corporations (CCs) are financially distressed.

Are you a director of a company? Make sure you're aware of your duties when your company is financially distressed

The Companies and Intellectual Property Commission (CIPC) says a director or a member of a CC has a duty to pass a resolution for a company's business rescue or alternatively resolve to wind up or liquidate in these two instances:

  1. As soon as he or she becomes knowingly aware that the company is either financially distressed;
  2. Or is trading in insolvent circumstances (both factually in that its liabilities exceed its assets, and commercially in that it cannot pay its debts to creditors as and when they fall due).

What is financial distress?

The Commission says financial distress when it comes to a company means that:
 

  • It appears to be reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable within the immediately ensuring six months; or
  • It appears to be reasonably likely that the company will become insolvent within the immediately ensuring six months.


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Is your business battling to keep its head above water?

Take this quick quiz to find out how to save your business from liquidation.
 

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What happens if a company is financially distressed and directors decide NOT to place it into business rescue?

In this case, the Commission explains that directors will have to deliver a written notice to each affected person, confirming that:

  • The company is financially distressed; and
  • Is NOT being placed into business rescue. You must also provide reasons for doing this.


Remember that 'the point of business rescue is to prevent the large number of liquidations that we are seeing in South Africa. It's hoped that this process will allow companies to survive and grow,' says the experts at FSP Business.

So if your company is in financial distress, its best you pass a resolution for the company to go under business rescue. Make sure you do this now that you're aware of your responsibilities.



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