Up Again South Africa: Governance


1. What are the key topics that boards should focus on to ensure proper discharge of their duties as directors, as their businesses return to work following a lockdown?

The Companies Act, 71 of 2008 sets out directors’ duties by providing standards of conduct directors need to comply with in discharging their duties. For a director to discharge their fiduciary duty, the board of directors must consider the following topics when developing the company's COVID-19 return-to-work plan/strategy:

  • Compliance with government and industry regulations: the Regulations and other sector and industry-specific regulations and directives have been promulgated in response to the COVID-19 global pandemic. The CIPC has, throughout the lockdown period, updated the public on how the Regulations and other governmental measures have affected its service offering: it can offer only limited electronic services for the duration of the lockdown (please see question 9 in the Premises and Workplace section of these FAQ for more detail on the limited service offering of the CIPC).

    Industry regulators such as the Johannesburg Stock Exchange and the Financial Sector Conduct Authority have issued industry-specific guidelines and notices that, for example, includes extending certain statutory timeframes regarding public companies' reporting obligations and directives intended to assist companies returning to work. Boards should therefore ensure the resumption of a company's operations is done in compliance with any government regulations, and as may be provided by the company's industry regulator in the form of guidelines, directives or notices.

  • Management of cashflow: all economies are facing uncertainty and many businesses are finding themselves entering unchartered territory as the full impact of the lockdown and COVID-19 pandemic on industries unfolds. In this regard, boards are encouraged to undertake detailed financial inquiries into the solvency and liquidity of the company. Directors are, as a result of their fiduciary duties, obliged to assess whether the business is “financially distressed” by determining if, at any particular time, it appears to be reasonably likely:
    • the company will be unable to pay all of its debts as they become due within the immediate ensuing six months; or
    • the company will become insolvent within the immediate ensuing six months.

    Against this background, should the board on reasonable grounds believe the company is financially distressed it must either:

    • pass a resolution commencing business rescue proceedings; or
    • deliver a notice to the stakeholders of the company explaining why the company may be regarded as financially distressed and providing reasons why it has chosen not to adopt a resolution initiating business rescue proceedings.This investigation into the company’s financial position will also indicate whether or not the company falls within the ambit of the prohibition against reckless trading.

    In relation to reckless trading, the CIPC issued a practice notice confirming it will not invoke its statutory powers to issue notices or compliance notices where it has reasonable grounds to believe a company is trading or carrying on business recklessly, with gross negligence or for a fraudulent purpose.

    The exemption applies only to companies that are, as a result of the COVID-19 pandemic, temporarily insolvent and still carrying on business or trading. This practice notice shall cease to apply within 60 days after the declaration of a national disaster has been lifted.

  • Employees and workplace: please see to question 1 in the People section of these FAQ, and question 1 above, which sets out the requirements businesses must to comply with before opening their doors to their employees.
  • Corporate restructure: during the phased reopening of the economy, many businesses may find themselves in a dire financial situation, and so the board of directors may need consider corporate restructure strategies to improve the company’s financial position. Restructuring mechanisms may include cost reductions, attempts to raise funds, debt restructuring, or placing the company in business rescue or proposing a voluntary liquidation.
  • Insurance and risk assessment: the board of directors should ensure the company’s insurance policies or arrangements are reviewed in the context of the COVID-19 pandemic. This may include seeking advice on the adequacy of its director and officer insurance policies in protecting the them against any liability or expense the company is lawfully permitted to indemnify.
  • Governmental relief and tax: the government has announced economic measures to respond to the disruption caused by COVID-19, intended to mitigate the worst effects of the pandemic on businesses, communities and individuals. These economic responses include:
    • tax relief;
    • the release of disaster-relief funds;
    • emergency procurement;
    • wage support through the Unemployment Insurance Fund; and
    • access to funding in respecting of small businesses.

Please see the Government Relief and Tax section of these FAQ for more detail on the tax measures the government has implemented to help businesses. Businesses should assess the extent to which they qualify for government support or relief.

2. Should boards adopt particular governance practices in this context?

Before boards implement any COVID-19-related corporate governance practices, they should consider the company’s constitutional documents and the Companies Act, to ensure such practices are legally valid and binding in respect of the company’s powers. Governance practices boards may adopt to minimise the impact COVID-19 on the company’s business and operations include:

  • COVID-19 committee: boards should consider establishing a COVID-19 response committee responsible for updating the company policies in accordance with governmental and industry regulations and strategies. The committee may also be responsible for developing an appropriate return-to-work plan, as required, by setting out an employee work schedule, health and safety measures and employee communication plans in respect of COVID-19.
  • Board meetings: the Companies Act already makes provision for board meetings to be held by electronic means, unless provided for otherwise by the company’s constitutional documents and as long as the electronic means to be used for purposes of the board meeting enables all participants in the meeting to communicate concurrently with one another, without an intermediary, and to participate effectively in such meetings. Directors also have a duty to communicate to the board, at the earliest possible opportunity, any material information that comes to any director’s attention, unless the director reasonably believes the information is immaterial to the company or publicly available, or is bound (legally or ethically) not to disclose the information. In discharging this duty, directors should hold regular meetings and keep detailed minutes.
  • Stakeholders: boards need to be inclusive when making critical decisions and implementing COVID-19-related policies or measures, by considering stakeholders’ views and concerns to ensure transparency. Public companies may, under the Johannesburg Stock Exchange Listing Requirements, be obliged to make certain disclosures to stakeholders (e.g. price sensitive information, publication of trading statements and material risks specific to an issuer, its industry or securities arising from or in connection with COVID-19).
  • Experts: throughout the lockdown the government, public bodies and industry regulators have published regulations, guidelines, directives and practice notes relating to:
    • the filing of annual reports by private companies; publication of interim or annual financial statements/reports by public companies;
    • reporting obligations of public companies; and
    • payment, cancelation or postponement of dividend payments by public companies.

    Therefore, it may be advisable to consult with financial or legal experts to better understand the implications of these policy updates on the company and to ensure compliance.

  • Supply chain and key contracts: supplier and customer contracts should be reviewed to determine whether the agreements provide for any protection or contractual relief in circumstances where performance of contractual obligations was or may be affected by the COVID-19 pandemic or related events.
  • Cost-saving approach: companies are likely to assess various measures to preserve cash, such as those relating to dividends, director/employee incentive payments, and share buybacks. Generally, the board of directors has sole discretion on the declaration of dividends. The directors may not authorise a dividend payment unless it can be reasonably concluded that the company will satisfy the solvency and liquidity test on payment of such dividends. The solvency liquidity also needs to be applied where there is a proposed buy-back of shares held by a director, or a buy-back of more than 5% of the issued share capital of a particular class of shares. If the company’s liquidity is constrained, as a result of COVID-19, the board may need to review its dividend policies and director or employee incentive payments.
  • Data protection: the government has encouraged companies to continue allowing their employees to work from home, to the extent possible, and governmental regulations provide for a certain percentage (depending on the industry) of a company’s employees to return to the workplace, which will gradually increase as the lockdown restrictions are eased. This means many employees will still be working remotely and companies should ensure they have the necessary policies to ensure that security information risks are reduced, that access to internal IT infrastructure is limited, and that there are strict controls around data processing, access or sharing.

3. To what extent are boards being encouraged to take into account corporate purpose and values in the context of COVID-19 and a return to work?

The president of South Africa and the National Coronavirus Command Council have continuously engaged with the country’s industry bodies to develop a response to COVID-19. This has resulted in South Africa’s business community, in various ways, coming together and combining resources, as a way of limiting the economic, social and health impact of COVID-19. Such initiatives include Business Unity South Africa, along with other companies and business associations, establishing a project management office aimed at pursing a collaboration with government to use the available business resources and capacities to support public sector initiatives.

The purpose of this collaboration between the public and private sector is to put the needs of South Africa at the forefront, by establishing task teams to proactively assess and implement business initiatives to deal with the effects of COVID-19 not only on the economy, but also on the health and labour sectors.

The government has established the Solidarity Fund for the sole purpose of responding to the COVID-19 crisis. The public, civil society, private and public sectors are encouraged to use this platform to contribute to the consolidated effort to fund various initiatives. The Solidarity Fund is independent of both government and business, and is primarily responsible for controlling the donated funds. The fund has undertaken to make public details of all donations received, and of payments made from the Solidarity Fund.

The government has announced several economic measures to fight the economic effect of the lockdown. The measures include the president and his executive cabinet taking a one-third salary reduction for the next three months. This portion of their salaries will be donated to the Solidarity Fund. The president further encouraged the business leaders of South Africa to consider implementing similar measures. In response, some companies announced that their board of directors or officers have agreed to reduce their salaries by approximately 30% for a period of three months, to be used in support of various initiatives.

The Prudential Authority of the South African Reserve Bank published a guidance note advising regulated banks they must appropriately conserve capital to ensure their capacity to support the economy and absorb immediate and medium to long-term losses, in an environment of heightened uncertainty caused by COVID-19.

To ensure banks having the necessary capital resources available for this purpose, the Prudential Authority confirmed it does not encourage banks to distribute dividends on ordinary shares this year or to make payments of cash bonuses to executive officers this year. Insofar as the directors of these banks have already declared a distribution of dividends, they are encouraged to take appropriate action in accordance with the law, and as contemplated by this guidance note, when making such distributions.


4. Your company is facing liquidity issues as a result of COVID-19:

a. What are the repercussions for continuing to operate your company?

Section 22 of the Companies Act specifically prohibits a company from trading recklessly or under insolvent circumstances, for instance, by incurring debt with no prospect of repaying the debt, as and when it falls due (commercial insolvency).

Potential consequences of reckless trading include:

  • the directors of the company being held personally liable for damages to the company;
  • the directors being held personally liable to any other person (including a creditor) for damages suffered as a result; and
  • the directors being declared “delinquent” on application to court.

Ordinarily, the CIPC may issue a compliance notice to the company requiring it to cease carrying on its business or trading. However, as a result of COVID-19, the CIPC issued a practice note stating that it will not invoke these powers, for the time being, in the case of a company that is temporarily insolvent and that continues to carry on business or trade. This is subject to the proviso that the insolvency must be due to business conditions caused by the COVID-19 pandemic. The practice note will lapse within 60 days after the declaration of the national disaster has been lifted. The CIPC practice note does not release a company or its directors from their statutory obligations under the Companies Act.

Third parties such as creditors may apply to place the company into business rescue or liquidation if it is commercially insolvent.

b. Do you have to file for insolvency if your company cannot pay all its debts as they fall due?

Not necessarily, but the position must be carefully managed from a legal perspective.

The board of directors and/or shareholders must consider the most appropriate remedy/resolution in the circumstances, which may include:

  • debt restructuring;
  • securing emergency funding (where applicable, request debt stand-still);
  • renegotiation of contracts;
  • placing the company into business rescue; or
  • placing the company into liquidation (filing for insolvency).

If the company is in financial distress (as defined in the Companies Act) and there is a reasonable prospect of rescuing the business, the board of directors have a duty to either pass a resolution placing the company into business rescue. If they do not want to pass such resolution, the board must deliver a written notice to all affected persons setting out reasons for not adopting a resolution to place the company in business rescue. However, the latter course of action may lead to an affected party applying to court to place the company in business rescue or liquidation.

c. Are there any steps that should be taken to minimise the risk of your actions as director being challenged?

Directors must ensure strict compliance with their fiduciary duties (common law and statutory) and perform their duties with due care and skill. For example, directors must:

  • know and abide by their legal obligations;
  • ensure material decisions of a company are recorded in writing and that good corporate governance is maintained;
  • properly and timeously perform an honest appraisal (solvency and liquidity test) of the company’s financials, to have a clear forecast of the company’s financial position and to make appropriate decisions;
  • ensure the company is not trading recklessly or under insolvent circumstances;
  • if the company is financially distressed/insolvent, ensure appropriate resolutions are passed to authorise applicable measures;
  • manage stakeholders;
  • consult with experts and/or secure independent professional advice on in respect of COVID-19 issues and/or legal issues arising from COVID-19; and
  • review contracts and insurance policies to determine matters affected by COVID-19 and company’s obligations arising as a result.

Please see questions 1 and 2 above for more detail on the actions directors may be required to take to discharge their fiduciary duties.

d. Will your company be wound up if you fail to make payments when due?

It is possible, but not a foregone conclusion. Examples of when a company may be wound-up include the following:

  • Creditors may apply to court application to wind-up the company if a debt of at least ZAR100 remains due and payable to the creditors, and despite a written demand for payment within three weeks having been delivered under section 345 of the Companies Act, the debt remains due.
  • Where a court judgment has been granted against the company and on execution of the judgment debt by the sheriff, insufficient disposable property is found to discharge the judgment debt.