What Directors must know about Wrongful Trading in South Africa
- Solvendi - A Tradition of Excellence
- Mar 30
- 3 min read
As a company director, you have serious legal duties in South Africa. When your company runs into financial trouble, those duties become even more apparent and important. One of the biggest risks you face as a director is wrongful trading. If you serve on a board, you need to understand what directors must know about wrongful trading in South Africa before problems arise.
Here's what Directors must know about Wrongful Trading in South Africa
Let's talk about wrongful trading first. Wrongful trading happens when directors allow a company to keep trading while it is financially distressed. There is absolutely no reasonable prospect of avoiding insolvency.
In other words, if the company cannot pay its debts and there is no realistic plan to fix the problem, directors must not continue business as usual.
In South Africa, this principle sits mainly in the Companies Act 71 of 2008. Section 22 prohibits a company from carrying on business recklessly, with gross negligence, with intent to defraud any person, or for any fraudulent purpose. If directors ignore clear warning signs and continue trading, a court may find that they breached this duty.
Wrongful trading does not require fraud. Even honest directors can be liable if they act carelessly when the company is clearly in trouble.
When is a Company Financially Distressed?
The Companies Act 71 of 2008 defines financial distress as a situation where it appears reasonably unlikely that the company will be able to pay its debts as they fall due within the next six months, or where it appears reasonably likely that the company will become insolvent within that period.
Directors must actively monitor cash flow, liabilities, and forecasts. They cannot wait for the auditors to raise the alarm. If management accounts show mounting losses, unpaid creditors, or defaulted loan agreements, directors must treat these as red flags.
The law expects directors to apply their minds. Courts will ask what a reasonable director would have done in the same circumstances.
Personal Liability Risks
Many directors believe the company structure shields them from personal liability. That protection is not absolute. If a court finds that directors allowed reckless or fraudulent trading, it may hold them personally liable for company debts.
Section 77 of the Companies Act 71 of 2008 allows claims against directors for losses suffered by the company because of their reckless trading. In addition, directors may face delinquency proceedings. A court can declare a director delinquent, which may disqualify that person from serving as a director for many years.
Practical Steps Directors Should Take
Directors must insist on up-to-date financial information. They should review cash flow forecasts regularly and question unrealistic assumptions. If the company struggles to pay suppliers, staff, or the tax authorities, directors must treat this as urgent.
They should document all board discussions about financial distress. Clear minutes that record concerns, professional advice, and decisions can be critical evidence if a dispute arises later. Directors should also avoid improperly preferring certain creditors. Paying one creditor in full while ignoring others, especially when insolvency is looming, can attract further scrutiny.
Most importantly, directors must not trade on hope. Optimism is not a strategy. If there is no reasonable prospect of turning the business around, they must act decisively. That may mean filing for business rescue or placing the company into liquidation.
Final Thoughts
What directors must know about wrongful trading in South Africa is simple but serious. The law does not punish business failure. It punishes irresponsible conduct when failure is obvious. Directors who stay informed, act early, and seek professional advice reduce their risk significantly. Those who ignore the warning signs may find that the cost of delay comes out of their own pockets.
If your company requires insolvency services, our insolvency practitioners can help. For sound legal advice, give us a call for a free assessment today.
Disclaimer: This article is intended for general informational purposes only and should not be interpreted as legal advice. Any actions taken based on the information provided are done so at your own discretion. Solvendi cannot be held liable for any outcomes resulting from such actions. We encourage you to consult with us directly before making decisions solely based on the content of this article.
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