SA companies can trade ‘recklessly’ during the Covid-19 disaster – and 60 days beyond

Business Insider SA
Market crash

    • The Companies and Intellectual Property Commission (CIPC) has promised to not invoke some of its powers under the Companies Act during the Covid-19 disaster, and for two months afterwards.
    • That gives South African companies leeway to trade "recklessly", while they are insolvent, which is normally against the rules.
    • That may give some businesses – including the likes of Edcon – the leeway to trade out of the trouble they'll get in because of the national lockdown.
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    The Companies and Intellectual Property Commission (CIPC) has thrown a lifeline to companies large and small which suddenly find themselves amid the coronavirus crisis.

    The CIPC, which regulates the Companies Act, issued a directive on Tuesday 24 March, 2020 which says it will not invoke its powers under section 22 of the Act where a company is temporarily insolvent and still carrying on business or trading.

    This, it says, “is only applicable where the commission has reasonable grounds to believe that the insolvency is due to business conditions, which were caused by the Covid-19 pandemic."

    The CIPC evidently believes that the impact of the 21-day national lockdown will cause economic fallout for some time beyond this period. Its directive, which it calls a practice note, will lapse 60 days after the declaration of a national disaster has been lifted.

    The note, signed by CIPC commissioner Rory Voller, says section 22 of the Companies Act empowers the commission to issue notices, and if necessary compliance notices, to companies which it has reasonable grounds to believe is trading or carrying on business activity recklessly, with gross negligence or with a fraudulent purpose. This will now not apply to companies which have trading difficulties caused by the virus. 

    Corporate law specialist Stephen Kennedy-Good at Norton Rose Fulbright, says the CIPC decision is a good move,”the right thing to do”.

    He says the CIPC directive is not surprising, given present conditions and the exemption is clear that it applies to situations caused by the pandemic. Companies which were in trading difficulties before the pandemic will not be covered.

    “The regulator is trying to relax the application of the rules, but making it clear this is for companies forced into a situation by the virus which is not of their making.”

    Kennedy-Good says that companies should try and do the best they can under the circumstances, to be open with staff, suppliers and creditors. “Companies need to work on the relationship side, to speak to their bankers, suppliers and landlords.”

    He says these are tricky issues. If a company can’t afford to pay rent, for example, this obviously impacts negatively on the landlord too.

    Kennedy-Good cites the conference call Edcon chief executive Grant Pattison made to suppliers on March 26 as a case in point. At the end of the call Pattison is heard to break down

    “Pattison was open about the position the company finds itself in,” says Kennedy-Good. “The stores had been shut with loss of income. No chief executive can do better than that.”

    Pattison referenced in the call the CIPC decision to grant the reckless trading exemption in terms of section 22 of the Companies Act.

    Edcon has estimated that it will lose R1.2-billion in revenue from the point President Cyril Ramaphosa announced the state of disaster on 15 March to the end of the planned 21-day national lockdown.

    Pattison told Edcon’s suppliers that the company only had sufficient liquidity to pay salaries but was "unable to honour any other accounts payable during this period”.

    He said orders already placed may be cancelled and that any future trade should be based on their assessment of Edcon’s ability to pay both for arrears and future purchases, orders and services.

    “In the midst of our own stress and fears we acknowledge the real impact our financial situation has on you and your businesses and the devastating effects our decisions will have on your operations. We can only sympathise with you.”

    A R2.7 bilion rescue package for Edcon was announced last year, with the Public Investment Corporation committing R1.2 billion from the Unemployment Insurance Fund (UIF), with other funders and rent reductions making up the difference.

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