South Africa: Ayo Technology - How Do You Stop a Company From Being Stupid?

analysis

Can you stop a company from being stupid? It's a less frivolous question than it might appear. It's actually difficult to prevent companies from acting outside of the interests of their own shareholders.

The obvious recent case in point is AYO Technology, which suffered a 36% revenue decline in the half-year to February, plunging the company into a loss-making situation. But it then went ahead and calmly declared a dividend 86% higher than its previous dividend, which will cost the company around R200-million.

To me, the first question here is whether this constitutes reckless trading as defined by section 22(1) of the Companies Act. The section says: "A company must not carry on its business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose." If it does, directors become personally liable.

But what is "reckless"? Normally, it constitutes a situation where a company that is already in debt, goes out and raises more debt despite knowing that it's unlikely it will be able to repay its creditors. Because you are looking into the mind of directors, proving reckless trading is tricky; directors are often more confident about their company's prospects than they should be,...

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