CIPC will not exercise its power to stop temporarily insolvent companies from carrying on business or trading
On 24 March 2020 the Companies and Intellectual Property Commission (Commission) issued Practice Note GNR 351 (Practice Note) in which it advised that in light of the Covid-19 pandemic and the declaration of a national state of disaster under the Disaster Management Act, 2002, it will not invoke its powers under section 22 of the Companies Act, 2008 (Companies Act).
In terms of section 22(1) of the Companies Act, a company is prohibited from carrying on business recklessly, with gross negligence, with the intent to defraud any person or for any fraudulent purpose. Section 22(2) of the Companies Act empowers the Commission, where it has reasonable grounds to believe that the company is either –
- unable to pay its debts as they become due and payable in the normal course of business; or
- carrying on its business recklessly, with gross negligence, with the intent to defraud any person or for any fraudulent purpose,
- the reference to a company’s inability to pay its debts as they become due and payable in the normal course of business under section 22 of the Companies Act must not be confused with the similar requirement when the solvency and liquidity test in terms of section 4 is applied, where a company makes a distribution. The requirement in terms of section 46 of the Companies Act that a company must apply the solvency and liquidity test where it makes a distribution (which includes satisfying itself that it will be able to pay its debts as they become due in the ordinary course of business for a period of 12 months after the test is considered, or after the distribution is made), has not been altered by the Practice Note and remains a requirement that must be complied with at all relevant times;
- where a company carries on business recklessly, with gross negligence, with the intent to defraud any person or for any fraudulent purpose, or where the company’s temporary insolvency is caused by any circumstances other than the declaration of a national state of disaster and subsequent lockdown, the Commission will still continue to act as such against the company under section 22 and issue a compliance notice where necessary;
The provisions of the Practice Note will be effective for the duration of the state of national disaster, and for a period of 60 days after the declaration thereof has been lifted.