The New Companies Act of 2008 brings liquidations in South Africa more in line with countries like America, Canada and England.  Because the New Companies Act places a heavy burden on company Directors to ensure that their companies does not carry on business recklessly, gross negligence or intend to fraud or specifically to trade under insolvent circumstances.  Under the old companies act Directors could be held personally liable for reckless trading, gross negligence or fraudulent trading.  The new companies act however tightens the noose.

The New Companies Act compels Directors in South Africa to consider liquidation or company rescue should a company enter into a position where it is reasonably foreseen that the company will not be able to pay its creditors within the next ensuing six months.

Although it is unclear what the legislator meant by the term “trading under insolvent circumstances”, it can obviously only refer to solvency (balance sheet) and liquidity (income statement).  The new companies act (Section 4) states that solvency pertains to the assets of the company, fairly valued versus liabilities.  Liquidity obviously pertains to the ability/inability to pay creditors.  It is our opinion that, because of the new Companies act, liquidations in South Africa will rise due to the more stringent obligations that rests on Directors to act.

It is imperative that Directors be aware of the circumstances in which they can be held personally liable for the debts of their companies.  Directors should on an ongoing basis monitor the solvency of their companies.

Section 76(3) of the New Companies Act states that a Director must perform his functions in good faith and for a proper purpose; in the best interest of the company; and with a degree of care, skill and diligence that may be reasonably expected of such a person who carries on the same functions in relation to the company as those carried out by that Director and; having the general knowledge, skill and experience of that Director.

Liquidation of a company should be the last resort.

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