Cox Yeats, a leading South African law firm with offices in Durban, Johannesburg, and Cape Town, has long operated in sectors ranging from construction and insurance to insolvency and restructuring.  

Ahead of their first appearance at the African Insurance Exchange (AIE) conference, partners Gareth Cremen and Mongezi Mpahlwa sat down with COVER to unpack the realities of business rescue, liquidation, and the crucial role of directors’ and officers’ (D&O) insurance.

Why businesses end up in distress - According to Cremen, the main drivers pushing companies towards business rescue or liquidation are rooted in poor financial management, inadequate cash flow planning, uncontrolled operational costs, overextended credit lines, and an overreliance on debt. Many small businesses fail to implement robust budgeting or forecasting processes, relying instead on anticipated contracts that never materialise.

Another common trap is overexpansion. Companies may land a major contract and scale too quickly, increasing costs without ensuring sustainable profitability. Aggressively cutting contract pricing can also backfire, leaving margins too thin to absorb any missteps. Economic pressures, from currency fluctuations to international tariffs, and a failure to adapt to changing market conditions compound these risks. In some cases, fraud, theft, or misappropriation of funds by directors accelerates the decline.

The role of practitioners and liquidators - Once financial distress reaches a tipping point, a company may enter business rescue or liquidation. Business rescue practitioners (BRPs) are appointed either voluntarily by the board or via court order. They assume full management control, with a mandate to return the company to solvency or deliver a better return for creditors than immediate liquidation would. This involves balancing the interests of multiple stakeholders including creditors, employees, shareholders, unions, and directors, while ensuring transparency and compliance with the Companies Act.

Liquidators, on the other hand, step in to wind up a company’s affairs after a voluntary or compulsory liquidation. Their responsibilities include taking control of assets, investigating potential misconduct, and recovering misappropriated funds for creditors. They operate under the Insolvency Act, with some provisions from the 1973 Companies Act still in effect.

Both BRPs and liquidators are legally obliged to report misconduct, such as reckless trading or fraud, to relevant authorities, from the Companies and Intellectual Property Commission (CIPC) to the Financial Intelligence Centre. In some cases, they can hold directors personally liable for company debts under section 424 of the old Companies Act.

D&O insurance, protection and limitations – Mpahlwa pointed out that D&O insurance exists to protect directors from personal financial loss when sued for decisions made in their professional capacity. Policies typically cover legal defence costs, settlements, and damages arising from claims of negligence, breaches of fiduciary duty, and regulatory non-compliance, provided the acts were committed in good faith.

However, Cremen and Mpahlwa caution that D&O insurance is not a blanket shield. Fraud, criminal conduct, intentional wrongdoing, and personal profit from undisclosed conflicts of interest are excluded. For example, in a recent Delta Property Fund ^[1]case, directors’ reckless and dishonest conduct triggered policy exclusions, leaving them without coverage.

Policies also vary in terms of coverage limits, exclusions, and the scope of indemnified activities. Directors should regularly review their cover to ensure it aligns with evolving business activities and regulatory risks. In certain situations, complementary policies, such as commercial crime cover, may be necessary to address exposures beyond D&O’s reach.

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