Reckless trading penalties suspended to help deal with Covid-19 fallout
CIPC will not act against companies temporarily insolvent due to the national disaster
Provisions in the Companies Act meant to prevent reckless trading will not be invoked during the national lockdown, giving companies the leeway to survive the lockdown, parliament heard on Tuesday.
The Companies and Intellectual Property Commission (CIPC) told parliament’s trade & industry portfolio committee during an online briefing it will not invoke the reckless trading provisions if it has reason to believe that companies are temporarily insolvent due to the national disaster. The CIPC administers the Companies Act and is responsible for the registration of companies.
“This has been welcomed by companies and industry who are attempting to recapitalise their businesses,” CIPC head Rory Voller said.
The Companies Act penalises and holds directors personally liable for losses incurred through knowingly carrying on the business of the company recklessly. The act states it is illegal for directors of an insolvent company to continue trading after they become aware of its insolvent status.
Many companies, some of which have been forced to stop trading under the lockdown regulations meant to curb the spread of the coronavirus, are struggling to stay afloat and are on the brink of collapse.
Several have applied for business rescue, a process that allows a financially distressed company to delay creditors’ claims against it or its assets, and more are set to follow this route. Companies that have taken the business rescue route include Edcon, which was until recently SA’s largest clothing retailer, as well as airlines SAA and Comair.
Voller pointed out that in terms of the act, a company trades recklessly if its solvency (liabilities exceed assets) or liquidity (ability to pay debts as they fall due) is compromised. In that case the CIPC will investigate the company and issue a compliance notice to cease trading based on reckless trading.
“In term of the practice note issued [in] March 2020, and for the duration of the Covid-19 national disaster, the CIPC will not invoke the reckless trading provisions if the CIPC has reason to believe that the companies are temporarily insolvent due to the national disaster,” Voller said.
According to corporate and commercial law firm Cliffe Dekker Hofmeyr, the leniency granted by the CIPC is arguably meant to allow companies to trade out of commercial insolvency. However, “companies must be vigilant not to open itself up to potential claims by third parties”.
“It is abundantly clear that companies are not permitted to trade recklessly during Covid-19 (or at all). The Practice Note only affords protection from the CIPC in those limited circumstances where companies are temporarily insolvent as a result of Covid-19 and continue carrying on business or trading,” according to an article by Cliffe Dekker Hofmeyr.
In the same briefing in parliament, Nomsa Motshegare, the CEO of the National Credit Regulator (NCR), told MPs that various provisions were in place to soften the Covid-19 blow on credit active consumers.
The NCR, among other measures, had prohibited debt collection practices such as repossessions during the national disaster. The regulator will also be embarking on a consumer education drive mainly on debt counselling and credit life insurance, said Motshegare.
It will further conduct raids in smaller towns, townships and rural areas for illegal collection methods, such as the retention of bank cards, Sassa cards, ID books, and analyse the performance of loan books of credit providers to monitor the impact of Covid-19 on consumers.
Trade & industry portfolio committee chair Duma Nkosi said the prohibition on repossessions, however, does not mean those who are able to service loans should not be doing so. “Loans are still payable by those who are in a position to do so. We will continue to monitor the commitments and engage with entities to ensure they remain on track,” Nkosi said.