Duty to advise affected persons – s 129 (7) - My view - What is Your View?
The duty to report under s 129 (7) of Companies Act 2008 stems from
the reasonable belief by the directors of a company that such company is
financially distressed.[1]
It is submitted that the duty to report to affected persons and to provide
reasons why the directors did not adopt a resolution to place the company under
business rescue stems from the fiduciary duties a director has towards the
company. A director would have a duty to pass a resolution for a company’s
business rescue as soon as he or she becomes knowingly aware that the company is
either financially distressed thereby acting in the best interests of the
company. Therefore the intention of the legislature is clearly to publicize to
those affected persons - creditors,
shareholders and employees of the company - that despite its inability to pay
its debts in the ensuing six months or the possibility that it will become
insolvent in the ensuing six months, the directors believe, for the reasons set
out in the notice, that it is not necessary to pass a resolution for the
commencement of business rescue.
Section 129(7) does not contain any sanction if the board fails to
comply with this duty, nor does it provide any specified time limits in which
such compliance must occur
The question arises as to how long is it before it becomes unlawful
that the directors have not complied with the reporting requirements? One would
presume that it would be a reasonable period of time. As stated previously the
objective of such reporting provisions would be to inform for example creditors
of the precarious financial position of the company. In other words a warning
to the creditors that they will in all probability not get paid in the next 6
months; if ever. This warning system allows the creditor to take the necessary steps
to ensure that they do not suffer any losses. Therefore a reasonable time
period would be such time that would allow for a creditor to take all
reasonable steps to prevent losses. This in my opinion means that the directors
in terms s 129 (7) must report urgently without delay. A related question is
how long do the directors have to decide whether the company should or should
not be placed under business rescue once they have determined the company is in
financial distress. There also are no time periods set out in the 2008 Act
either for such a situation. Again it is submitted that this must be done urgently
without delay. Any delay that proves to cause loss to a creditor would be
unlawful.
The reference to urgently without delay should be interpreted as
applying from the point at which the director has reason to believe that the
company is in financial distress and they have taken the decision not to place
the company under business rescue.
Clearly such a time period would depend on the facts and
circumstances of the situation and will vary. However it is submitted that
consideration should be given to the many other relevant time reporting
deadlines mentioned in the 2008 Act. Section
129 (3) provides that a company has 5 business days to report to affected
persons once the resolution has been adopted. It must be emphasized that is
only once a resolution has been adopted.
Section 73 (4) provides that the board of a company may determine the
form and time for giving notice of its meetings. This notice must obviously be
reasonable. S 62 (1) provides for 15 days notice for a public company shareholders
meeting. There are many administrative issues that need to be dealt with and
the legislation deems 15 days notice to be reasonable. One can expect that a directors
meetings notice to be a much shorter time as s 73 (1) states a director authorised
by the board of a company may call a meeting of the board at any time. One can
be sure common/case law would say that a couple of hours notice was not
reasonable. However S 129 (7) is about the imminent loss that could be suffered
by directors. A major consideration would be to determine how far in advance of
meetings are board packs sent out? Seven
days appears reasonable. Therefore I would suggest 10 to 15 days appears
reasonable in the circumstances. This is enough time for directors take prepare
the necessary administration issues such as calling meetings; giving the
required notices etc; discussing and making informed decisions. However this
may be longer or shorter depending on the circumstances.
[1] Section 129(7) of the Companies 2008 states: “If the board of a company has reasonable grounds to believe that the
company is financially distressed, but the board has not adopted a resolution
contemplated in this section, the board must deliver a written notice to each
affected person setting out the criteria referred to in section 128(1)(f) that
are applicable to the company, and its reasons for not adopting a resolution
contemplated in this section.”
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