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Leadership 101 – The Role and Responsibility of Directors – Part 14

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Please note that this pertains to South African Legislation, the King Requirements, and Best Practice.

None of us start our businesses with the intention to fail.

We all start with stars in our eyes and a dream in our hearts, but unfortunately sometimes, no matter how much we plan and implement, things go wrong and we find ourselves in the smelly brown stuff, with huge debts and very little income, if any at all.

This is the time when we have to face the music and if we do it fast enough, we may even find ourselves in a successful Business Rescue situation.

Please understand that it will probably be one of the most difficult things that you will have to do – no one likes to admit that they have failed no matter what the reason, but if the Board and in particular the Directors understand how important it is to act, not only independently, but more importantly, to act quickly and decisively in line with the obligations and regulations of Chapter 6 of the Companies Act, which deals with Companies that are in a distressed trading situation, there may be light at the end of the tunnel.

Early intervention will protect the Company from exposure to reckless trading allegations and also demonstrates the Boards fulfillment of its obligations to all the stakeholders.

To act proactively, the Board must explore all the turnaround opportunities before recognizing that Business Rescue proceedings and taking decisions around the commencement and action thereof, offer a final and formal consideration, but only after all other avenues have been thoroughly researched and investigated.

So what are the key questions that Directors should be asking?

1. First and foremost, of course, is to establish if there are any signs that Business Rescue would be on the cards in the future. If there is a possibility that there could be for whatever reason, this could be averted if we act sooner or even ask for assistance to turn the situation around.

2. Is the Company financially distressed? Clearly, it is of paramount importance to ensure that the books are done regularly and that the results are not spurious in nature, but that they accurately represent the financial position of the company.

3. Is there a reasonable possibility that the Company could be rescued and would the Company be able to recover? Is there future business in the pipeline that would be sufficient to ensure a healthy and sustainable inflow of income? Have the expenses be pared back to the bare minimum and now properly controlled to ensure that there is no undue wastage. Have proper procedures and controls been implemented to ensure that production is optimal and that theft and pilferage are contained?

4. Is the Company trading recklessly? Is there sufficient income to meet the expenses? If there isn’t, then you may be trading recklessly. Are there policies and procedures in place and are these monitored to ensure that production is optimal and that processes are adhered to minimize loss and prevent theft, fraud, and pilferage. If there aren’t, then you may be trading recklessly. Are expenses kept to a minimum? If not then you may very well be trading recklessly.

5. Should the Company be placed under Business Rescue and if so should the process be started immediately? This is a decision that needs to be taken at the board level. It is therefore extremely important to call for an urgent board meeting if there is a need. The requirement here is to act quickly and decisively.

6. Which Business Rescue Practitioner should be appointed. Please do proper research here as that there are (as in all professions), some really dodgy practitioners out there?

7. Is the Business Rescue Practitioner that you are about to appoint, sufficiently experienced and sufficiently independent to actually rescue the business? Ask the difficult questions and get some references and authenticate them.

8. What are the Board’s obligations to the stakeholders, the courts, and the appointed representatives?

9. Are we fulfilling our obligations as a Board as well as individual Directors, in line with laid down procedures of the Business Rescue proceedings?

Remember that Business Rescue is there to assist . . . but obviously if the Company is too far gone, it may be impossible to revive it. So it is of the utmost importance to take action sooner rather than later.

Next time we will have a look at Alternative Dispute Resolution.