Directors who fail to time it right may face civil and potentially criminal litigation.

The current economic climate has placed a severe strain on various industries in South Africa. And one industry that has had to bear the brunt of this uncertainty is the commercial property sector.

As reported, Real Estate Investment Trust (Reit) Rebosis board has, after a board resolution, entered into business rescue proceedings because the company is financially distressed.

The JSE has granted approval for the suspension of trading in certain classes of the company's shares. In a SENS statement issued by the company, its management and board deemed its 6-month cash flow vulnerable to significant risk, which included, amongst other reasons, the Reserve Bank's indications that there may be increases in the interest rate.

Commencing business rescue proceedings was necessary to provide the company with interim protection. In this vein, the management and board have indicated that they have proactively formulated a turn-around strategy, which is to be implemented by a business rescue practitioner.

It is of great importance for the management or board of a company to place a company in business rescue as soon as it is found that a company is financially distressed – and without delay, as is required by Section 129(7) of the Companies Act 71 of 2008.

The Companies Act deems a company to be financially distressed if:

  1. It appears to be reasonably unlikely that the company will be able to pay all its debts as they become due and payable within the immediately ensuing 6(six) months; or
  2. It appears to be reasonably likely that the company will become insolvent within the immediately ensuing 6 (six) months.

Unfortunately, for a variety of reasons, management boards tend to want to place companies in business rescue when they are already trading under insolvent circumstances.

Directors who fail to place a company under business rescue when required may be subjected to civil and potentially criminal litigation due to the provisions of, but not limited to, Section 77 and Section 214 of the Companies Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.