Charles Darwin lived in an age of discovery and adventure. He was a well-known and adventurous epicure who, being a member of the ‘Glutton Club’, reveled in the joy of eating different types of animals, the more exotic the better. Darwin travelled the world on the good ship Beagle and weathered many storms in his quest to taste the world and went on to define the theory of evolution.  Strange lands, strange meat and strange times.

We, however, live in even stranger times. A sick and tragically doomed pangolin (or bat)  sold in a Chinese ‘wet-market’ spread an incurable virus to a morbidly curious epicure who, in two months, brought the southern tip of Africa to a grinding and sudden halt. Yuval Harari, a prominent thought leader, has opined that “Yes, the storm will pass, humankind will survive, most of us will still be alive — but we will inhabit a different world.”  The decisions being made now by our and other governments will have long lasting impacts.

COVID-19 has brought upon the Republic a nationwide lockdown applicable to the vast majority of its citizenry both natural and juristic. The regulations promulgated since the declaration of a national state of disaster on 15 March 2020 are numerous and far reaching. All key regulatory frameworks relating to law of general applicability have been amended by virtue of the authority a State of Disaster imbues upon the various ministerial departments.

Laws have been lifted, shifted, paused and promulgated leaving the country to deal with a confusing set of often contradictory regulations over and above the possible horrors of a potently virulent novel corona virus.

This purpose of this article, however, is to provide some insight into the ways in which the roles of directors have changed over the past few weeks, with a particular focus on how director’s fiduciary duties may have been amended.

Insolvency and Reckless Trading during Lockdown

In the usual course the CIPC is empowered with the authority to issue compliance directives to companies which may be trading or carrying on business recklessly in circumstances which are either grossly negligent or for fraudulent purposes. This authority is derived by application of s22 of the Companies Act 71 of 2008 (the Companies Act)

On 24 March 2020 the Companies and Intellectual Property Commission (CIPC) issued a practice note on 24 March 2020 in terms of which CIPC took full cognizance of the huge financial burden now faced by companies in light of a nationwide lockdown. 

In terms of the directive and as a direct result the national disaster and the lockdown the CIPC will not invoke its s22 powers where a company has been rendered temporarily insolvent and is still carrying on business or is continuing its trade. This moratorium will subsist for the duration of the national disaster and will continue for sixty days after it has been lifted. The only caveat is that the insolvent conditions must be caused by “… the COVID-19 pandemic.”, a broad stroke of impressive proportions.

The purposes of the directive are to allow Directors of companies to carry on trading despite knowing that the company will not pass a solvency and liquidity test, as per s4 of the Companies Act. The rational is that the Director has been placed in novel and fictitious position and should not be forced to cease all trading activities simply due to a lull, albeit drastic, in turnover.

The question, however, is whether s77(3)(b) is still applicable and would allow for directors to be made personally liable for loss and damage caused as a consequence of a directors decision to carry on trading despite knowing it fails to pass the solvency and liquidity test and would be unable to pay its creditors when payments became due.

This will happen many times over in the coming weeks and months. But if a director facing the appalling reality of financial uncertainty does not make the decision to cease trading, pass resolutions for business rescue, liquidation or deregistration then are they still personally liable? The CIPC has passed an effective moratorium on its prosecution of reckless trading, but Directors still may be held personally liable for the decision to continue trading.

Further, the CIPC has not ‘legalized’ reckless trading, it has simply confirmed that it will not be taking any action in its own right against a director suspected of reckless trading. As such, it is highly likely that Directors could still be help personally liable for reckless trading by interested stakeholders taking advantage of s77(3)(b).

Possible defenses may very well lurk in an argument that trade continued with a view that everything would return to normal. However, that decision must be made in close consultation with the necessary financial information and must be well reasoning and well informed.

Conclusion

A measured approach to navigating the novel features of conducting business in a Lockdown will require an understanding of all the regulations so as to properly engage with all interested stakeholders. If a company is in financial distress and has limited scope for recovery the options available to directors are potentially numerous but require clear guidance.

Options now reside in various relief measures and regulations including those affecting landlord and tenant, consumer and supplier and employer and employee. The decision being made by our government are having immediate impacts which have already made an impact on the country.

We certainly do live in strange and confusing times, but with clear direction and an understanding of the legal landscape, Darwin, Pangolins and a new world order aside, this storm will pass. 

For more guidance and information on this and other topics please contact an expert at SchoemanLaw Inc.

Written by Reenen Lombard, SchoemanLaw Inc