Governance during Restructuring, the Board Question

A board's role during a corporate restructuring is different from its role in ordinary times. The company is not yet in crisis but it is also not in steady state. Decisions have to be made faster, information flows have to be tighter, and directors have to be willing to take positions on questions that would ordinarily be left to management. Boards that adjust well to the restructuring rhythm produce restructures that succeed; boards that continue to operate on ordinary-cycle cadence produce restructures that lose momentum and miss opportunities.

This piece sits under the m3 pillar on corporate restructuring versus business rescue. It sets out the governance disciplines that matter more during restructuring than they do at other times, and the directors' duties that apply when the company is under stress.

The rhythm shift

An ordinary-cycle board meets monthly or bi-monthly, reviews financial performance for the previous period, and considers strategic matters as they arise. Decisions on operational matters are typically delegated to management within defined authorities.

A restructuring-cycle board meets more frequently (weekly meetings during active restructuring phases are common), reviews more granular information (rolling weekly cash flow, covenant headroom, restructuring milestone progress), and takes positions on operational matters that would ordinarily sit with management. The rhythm shift is not just about frequency; it is about the depth of engagement the board provides on questions that ordinarily do not reach board level.

Boards that continue to operate on ordinary cadence during restructuring discover that decisions require sub-committee meetings between board meetings, that circulars are needed for decisions that could have been taken face-to-face, and that management ends up making calls the board should have made. The restructure loses momentum and quality.

Cash discipline

Cash discipline is the first governance shift. Ordinary boards see monthly or quarterly cash reports; restructuring boards should receive weekly rolling thirteen-week cash forecasts as a matter of routine, with variance explanations for material differences from the prior week's forecast.

The reporting should include: opening cash position; expected inflows by category (customer receipts, refinancing draws, asset sale proceeds); expected outflows by category (payroll, critical suppliers, tax, debt service); closing cash position; and covenant headroom against any liquidity covenant. Where the forecast shows a week or month at risk of insufficient cash, the board should know weeks in advance and should be positioned to authorise corrective action.

Cassim et al. (2021) note that directors who continue to operate a company after cash flow projections should have shown that solvency was at risk, expose themselves to personal liability for reckless trading under section 22 of the Companies Act 71 of 2008 (Republic of South Africa, 2008). The cash discipline is not just an operational discipline; it is a director's duty discipline.

Communication discipline

Corporate restructures leak. Employees, customers, suppliers, and the market learn things whether or not the board wants them to. The board's communication discipline is what determines whether the leaks are controlled or chaotic.

A well-run restructuring communication plan specifies what will be said to whom and when, and who has authority to say it. Employee communication typically comes from the CEO with board endorsement. Customer communication runs through the relevant sales leaders. Supplier communication runs through procurement leaders. Market communication (for listed companies) runs through the company secretary and the CEO within the constraints of the JSE Listings Requirements or the equivalent for the relevant market.

Boards that agree the communication plan at the outset and stick to it manage the restructure's information environment. Boards that let communication develop reactively find themselves managing rumour rather than fact. The 1997 South African corporate response to the Anglo American Platinum labour recovery and the SANDF integration communication framework illustrated the principle in different historical contexts: controlled communication produces controlled outcomes; uncontrolled communication produces the opposite.

Advisor discipline

A substantial restructure typically involves at least a lead financial advisor, transaction counsel, tax advisor, and often an independent business review specialist or a chief restructuring officer. Where the underlying transaction involves a scheme of arrangement, an independent expert on fairness is also engaged.

The board's advisor discipline is threefold. First, keeping the team aligned around the same set of facts and the same set of options; where advisors disagree on the underlying position, the board needs to resolve the disagreement rather than treating each advisor's view as an independent input. Second, making the difficult decisions the advisors surface; boards that treat advisors as a source of comfort rather than as a source of decision-forcing analysis get the restructure wrong. Third, managing the total advisor cost against the transaction budget; multiple advisors on multiple work streams can produce substantial fees, and the board should have visibility into the aggregate cost from the outset.

Directors' duties under stress

Directors' duties under South African common law and the Companies Act require directors to act in the best interests of the company, to exercise their duties with care and skill, and to avoid conflicts of interest. Under stress, these general duties intersect with statutory requirements.

Section 22 (reckless trading). Directors must not allow the company to trade in circumstances amounting to gross negligence, incompetence, or intention to defraud. Where trading in the current position is reckless (typically because insolvency is foreseeable and no defensible plan exists to address it), directors have a duty to act.

Section 129 (business rescue). Where the company is financially distressed and there is a reasonable prospect of rescuing it, the board may (and often should) file for voluntary business rescue. Directors who fail to consider section 129 in appropriate circumstances expose themselves to allegations that they preferred continued trading to the more protective rescue path.

Fiduciary duties in solvent restructures. Directors owe fiduciary duties to the company and, in the context of a restructure that binds classes of shareholders or creditors, must consider the interests of those classes. Where directors have conflicts of interest (as they often do in restructures that affect their own equity positions), the conflicted directors should recuse themselves from the affected decisions.

Directors' duties in stress are enforced retrospectively. Directors who wait to see whether the restructure succeeds before ensuring their conduct meets the required standards are exposed if the restructure fails. The disciplined posture is to ensure the conduct meets the standards throughout.

The chief restructuring officer

For substantial restructures, some boards appoint a chief restructuring officer as a temporary executive with responsibility for the restructuring workflow. The CRO's authority is delegated by the board and is distinct from the CEO's ongoing operational responsibility.

The division of responsibility between CEO and CRO varies by situation. In some restructures the CRO manages all counterparty engagement and advisor coordination while the CEO focuses on continuing operations. In others the CRO takes named work streams (typically financial restructuring) while the CEO leads the operational work. The board's role is to define the division clearly and to hold both roles accountable.

The independent director's role

Independent non-executive directors have a particular role during restructuring. They provide the perspective that executive directors, who may be conflicted or focused on operational issues, cannot easily bring. They chair the difficult conversations. They often lead the interaction with major shareholders and lenders.

Independent directors who take this role seriously are the anchor of good restructure governance. Independent directors who defer to executive directors on all matters may end up ratifying decisions the board should have interrogated more carefully.

Cross-border governance

Cross-border corporate groups add complexity to restructuring governance. Different jurisdictions have different directors' duties frameworks, different insolvency thresholds, and different regulatory expectations. Boards of cross-border groups need to coordinate the governance response across the affected jurisdictions.

The UNCITRAL Model Law on Cross-Border Insolvency (UNCITRAL, 1997) provides for coordination in formal insolvency proceedings but does not directly address governance in solvent restructures. Boards of cross-border groups should engage counsel with cross-border experience and should plan the governance response early in the restructure.

What good looks like

A well-governed restructure has a board that adjusts its rhythm to the restructuring pace, maintains cash discipline, controls communication, coordinates advisors, and holds itself to the higher directors' duties standard that stress requires. Independent directors provide the perspective and challenge that anchor the process. The board makes the difficult decisions the restructure requires without deferring them into paralysis.

A poorly-governed restructure has a board that continues at ordinary cadence, receives incomplete information, allows communication to develop reactively, treats advisors as sources of comfort, and defers directors' duties considerations to a later date. Restructures with these features often fail; the cost is borne by the company, the shareholders, and (retrospectively) the directors themselves.

The CentraSolve Corporate Restructuring module supports the governance workflow through the cash forecast tracking, the milestone and covenant register, the advisor coordination artefacts, and the directors' duties audit trail.

References

Primary legislation

Republic of South Africa. (2008). Companies Act 71 of 2008, especially sections 22 (Reckless trading), 76 (Duties of directors), 114 and 115 (Schemes of arrangement), and 129 (Business rescue). Pretoria: Government Printer.

Textbook and practitioner sources

Cassim, F. H. I., Cassim, M. F., Cassim, R., Jooste, R., Shev, J., and Yeats, J. (2021). Contemporary company law (3rd ed.). Cape Town: Juta.

Comparative and international sources

United Nations Commission on International Trade Law (UNCITRAL). (1997). Model Law on Cross-Border Insolvency, with guide to enactment and interpretation. Vienna: UNCITRAL.