Directors at War and the Liquidation Option – A Tale of Sibling Rivalry

Directors at War and the Liquidation Option – A Tale of Sibling Rivalry

“Family quarrels are bitter things. They don’t go according to any rules” (F. Scott Fitzgerald)

A company’s directors have both the power and the duty to manage the company’s affairs for its benefit.

When two or more directors are in place, it’s perhaps natural for the occasional disagreement to arise between them. Indeed, regular expression of a variety of different viewpoints and ideas can make for a strong, dynamic board and business. Provided, that is, that the directors are in the end result still able to agree on the decisions vital to their company’s continued operations. 

What happens though when disagreements and disputes escalate and make it impossible to continue running the business? Typically, communications break down to the extent that decision-making is paralysed. First prize will of course always be an amicable settlement – through formal mediation perhaps, or negotiation to buy out a dissenting director’s shareholding. But if these attempts fail, the company is in big trouble. 

Fortunately our law offers you an effective remedy in the form of the “just and equitable” liquidation. It comes with its own risks and can be costly, so it’s often regarded as a last-resort option (ask your lawyer for advice on the various other remedies that may be available to you), but it works. A recent High Court decision illustrates…

Sister v brothers in a deadlocked development company 
  • A sister and her two brothers owned, through their trusts, equal shares in a farm (partially inherited from their father and partially purchased from their uncle’s deceased estate). 
  • They were also the three directors (and, again through trusts, the equal shareholders) of a company formed to subdivide, develop and sell residential plots on parts of the farm.  
  • The company operated successfully and profitably for many years, paying substantial dividends to the shareholders, and has always been and remains solvent. 
  • Trouble began brewing it seems several years ago, primarily between the sister and the brother in charge of the day-to-day running of the company’s business.  Serious disagreements arose around an unhappy saga of sibling fallout – including the disputed existence of a partnership, alleged fraudulent stripping of over R6m by the brothers, and a litany of purported personal and familial abuse. 
  • All these allegations were hotly denied, although an undertaking by the brothers to not “emotionally abuse” their sister in a settlement agreement at one point clearly indicated to the Court that the relationship breakdown was not confined to the siblings’ professional affairs. The relationship between the directors and shareholders was, said the Court, “that of partners in a family context”. 
  • The sister applied for the liquidation of the company on the grounds that it was “just and equitable”. This is a procedure provided in the Companies Act for a court to have the discretion – even though a company is solvent – to liquidate it in order that an independent liquidator can take over. 
  • The brothers opposed the application, claiming that there was no deadlock in the functioning of the company or between the directors and shareholders, but the Court disagreed. Its order liquidating the company, and its reasons for doing so, provide a useful summary of how this particular law works in practice…
3 grounds on which to wind up a solvent company

The Companies Act allows a court to liquidate a solvent company on application by director/s or shareholder/s on any of three grounds –   

  1. “The directors are deadlocked in the management of the company, and the shareholders are unable to break the deadlock, and 
    • Irreparable injury to the company is resulting, or may result, from the deadlock; or 
    • The company’s business cannot be conducted to the advantage of shareholders generally, as a result of the deadlock;
  2. The shareholders are deadlocked in voting power, and have failed for a period that includes at least two consecutive annual general meeting dates, to elect successors to directors whose terms have expired; or
  3. It is otherwise just and equitable for the company to be wound up.”

That last “just and equitable” ground gives courts a wide discretion to reach a decision based on all the facts of each particular case. The Court in this matter found that the involvement of all the directors in the business had effectively come to a standstill and took into account the facts that there had not been a directors’ meeting since 2014 plus the sister had refused to sign the latest financial statements. 

It concluded that “the directors do not communicate and there is clearly immense personal animosity between them, and a lack of trust and confidence”, making it difficult to see how the company could continue its business. The lack of substantiation provided by the sister to back up some of her disputed allegations did not, said the Court, detract “from the fact of the breakdown in their relationship, and the lack of trust and confidence”.

It was therefore just and equitable that the company be wound up. 

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

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Business Rescue: Are Your Suretyships Enforceable? A R5.5m Lesson for Directors and Creditors

Business Rescue: Are Your Suretyships Enforceable? A R5.5m Lesson for Directors and Creditors

“Some people use one-half their ingenuity to get into debt, and the other half to avoid paying it” (George Prentice, newspaper editor and author)

You are owed a lot of money by a company that goes into business rescue. The business rescue plan provides for creditors like you to accept a dividend of only a few cents in the Rand in settlement of your debt. You stand to lose heavily.

But perhaps there’s hope yet – a director with assets has signed personal suretyship. Can the director now say “sorry, you adopted the business rescue plan so your claim no longer exists”, and refuse to pay you? 

The directors’ defence
  • A creditor was owed R6.5m for the lease of mining equipment to a company which was placed under business rescue. In terms of a business rescue plan approved by the creditor it was paid only a portion of its claim, losing its right to claim anything further from the debtor company.
  • The two directors of the debtor had signed a deed of suretyship in terms of which they stood as co-sureties and co-principal debtors with their company for all amounts owing.
  • The creditor duly sued the directors for its shortfall of some R5.5m The directors’ defence was that they were not liable because – 
    • The suretyship entitled the creditor to go after them only for “any sum which after the receipt of such dividend/s or payment/s may remain owing by the Debtor.” (Own underlining). 
    • Nothing remained owing by the debtor which had been released from its debt by the business rescue plan.
  • In other words, argued the directors, nothing was owed by the debtor company, so they were liable for nothing. 

  • Not so, said the Court. That “would render the terms of the deed of suretyship nonsensical and militates against the very reason for a creditor obtaining security against the indebtedness of a debtor i.e. to mitigate the risk of the debtor being unable to fulfil its obligations due to inter alia business rescue.” The business rescue plan made no provision for the position of sureties and therefore “the liability of the sureties is in my view preserved.  And while the debt may not be enforceable against [the company], it does not detract from the obligation of the sureties to pay in the circumstances of this case.” In other words, a surety’s liability is unaffected by the business rescue unless the plan itself makes specific provision for the situation of sureties.
  • Bottom line – the directors must personally cough up the R5.5m (plus interest and costs).
Lessons for directors and creditors

The outcome here could have been very different had the wording of either this particular suretyship or the business rescue plan supported the directors’ defence.

Creditors – when securing your claim with a director’s suretyship check that you are fully covered in any form of business failure situation.  And ensure that a business rescue plan specifically provides that its adoption does not release sureties. 

Directors – when you sign personal surety understand exactly what you are letting yourself in for. And if you are unlucky enough to find yourself in the middle of a business rescue, actively manage your personal liability danger – particularly when it comes to the wording of the rescue plan.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

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The Importance of Directors’ Meeting Minutes – “Who, What, Where, When and Why?”

The Importance of Directors’ Meeting Minutes – “Who, What, Where, When and Why?”

“A company must keep minutes of the meetings of the board, and any of its committees…” (Extract from the Companies Act)

Steinhoff and other high profile corporate scandals both here and overseas highlight the need for directors to ensure that their board and committee meetings (and the decisions taken at them) are correctly and accurately recorded.

The point is that as a company director you are given wide powers by our Companies Act, but you also have to comply with a raft of fiduciary duties and statutory responsibilities. Failure to do so exposes both your company and you personally to substantial risk.

A vitally important aspect of managing this risk is ensuring that proper minutes of your meetings are kept.

 

Good minute keeping – Who? What? Where? When? Why?

Here’s an idea worth following. U.S. law firm Patterson Belknap Webb & Tyler’s article “A Minute Guide to Minutes” (available here) suggests that you always cover the “5Ws”. In a local context these cover –

  • Who?  The names of all attendees, their capacities and, if anyone was present for only part of the meeting, which part. Record also any apologies or non-attendances. Remember that you may need to prove later that there was a quorum.
  • What?  What happened in the meeting in relation to the agenda, the subjects discussed, decisions made and actions taken (resolutions passed must by law be numbered sequentially and dated), summaries of any presentations made by outsiders (such as staff or outside advisers like your lawyers), any important regulatory issues like declarations of conflict of interest (this latter is again a legal requirement), and so on.Bear in mind the fundamental duty of directors to act in the company’s best interests, to understand the issues facing the company, and to formulate their own, independent views so they can actively contribute at board meetings. The minutes should reflect this. In addition, all directors should be sent a comprehensive pack at least 7 days before the meeting to give them time to prepare, and on an individual basis they should keep their own notes during the meeting and retain them as proof of having applied an independent mind to the issues.

    Have your lawyers review the minutes in relation to any contentious issues discussed, particularly where there is any possibility of litigation or investigation by statutory bodies like SARS or the Competition Board.

    Generally, strike a balance between too much detail and too little here – ensure that the minutes reflect everything of importance and give an accurate sense of the meeting without drowning in unnecessary detail.

  • Where?  Ensure that the minutes (and any relevant documents referenced in them) are kept securely by the company secretary or a director for at the very least the statutory minimum of seven years.
  • When? It’s important that the minutes be written and approved shortly after meetings, and circulated to all directors whilst the meeting is still fresh in their minds.
  • Why?  Directors’ meetings are fundamental to the good management of your company and to the decisions that you as a board make on its strategic direction. How these meetings are minuted could prove critical if for instance disputes or litigation or regulatory issues arise in the future.

In a nutshell, since minutes are, once signed by the chair, “evidence of the proceedings of that meeting” and of resolutions adopted, they provide the most important historical record of how and why decisions were taken. Prioritise this vital and legally-required recording process accordingly. 

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

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