DOES THE COVID 19 STATE OF DISASTER GIVE YOU PERMISSION TO TRADE RECKLESSLY?
You may have heard that on the 24th of March 2020 the Companies and Intellectual Property Commission (“CIPC”) issued a practice note advising that it will not invoke all its powers under section 22 of the Companies Act 71 of 2008 (“the Act”) during the Covid-19 disaster and for a certain period thereafter.
In essence, section 22 empowers the CIPC to issue a compliance notice to a company, requiring a company to cease carrying on its business or trading, if the company is carrying on its business recklessly, with gross negligence, with intent to defraud any person, for any fraudulent purpose or is unable to pay its debts as they become due and payable in the normal course of business.
The said practice note states that the CIPC will not invoke its said powers where a company is temporarily insolvent and still carrying on business or trading, provided the CIPC has reason to believe that the insolvency is due to business conditions, which were caused by the Covid-19 pandemic. The CIPC will not invoke its said powers during the Covid-19 disaster and for a period of 60 days after the declaration of the national disaster has been lifted.
Commentators have noted that this provides leeway to companies to trade recklessly during the state of disaster. Whilst this is arguably correct, it is nevertheless important for any director of a company trading under insolvent circumstances to bear the following in mind:
- The fact that the Commission may not issue a compliance notice forcing a company to cease trading does not change the prohibition for a company to carry on its business recklessly in terms of section 22(1).
- The said practice note is explicitly restricted to circumstances where a company is trading under insolvent circumstances caused by the Covid-19 pandemic. Accordingly, the CIPC might still issue a compliance notice in respect of a company, which was already trading under insolvent circumstances when the Covid-19 state of emergency was declared.
- Section 77(3)(b) of the Act still holds that a director of a company is liable for any loss, damages or costs sustained by the company as a result or indirect consequence of the director having acquiesced in the carrying on of the company’s business despite known that it was being conducted in a manner prohibited by section 22(1). This means that a director can still incur liability to the company, even if the CIPC does not issue a compliance notice in terms of section 22.
- Section 218 of the Act states that any person who contravenes any provision of the Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention. Accordingly, a contravention of section 22(1) opens the responsible persons up to a claim to any person who suffered damage as a result.
It does seem that this CIPC notice creates a loophole for businesses to act recklessly and dodge normal trading practice, in practice however a plaintiff would have a difficult hurdle to cross in successfully proving a claim in terms of section 77 or section 218. However, despite this and based on the above, we do not recommend that any director allows a company to trade recklessly and/or under insolvent circumstances despite the fact that the CIPC might not issue a compliance notice in terms of section 22 during this state of disaster.