Directors of South African companies have significant personal liability exposure when a company is in financial distress. The Companies Act imposes obligations on directors that become more onerous — not less — as the company's financial position deteriorates. Understanding these obligations is critical for any director of a distressed company.
The General Duty: Act in the Company's Best Interests
Section 76 of the Companies Act requires every director to act in good faith and in a manner the director reasonably believes to be in the best interests of the company. In normal circumstances, the "best interests of the company" aligns broadly with the interests of shareholders. In distress, this calculus shifts.
When a company is insolvent or approaching insolvency, the interests of creditors come to the fore. A director who continues to act solely in the interests of shareholders — for example, by continuing to trade in the hope of a recovery that will benefit equity — at the expense of creditors, is at risk of breaching their duty.
Reckless Trading and Gross Negligence
Section 77(3)(b) of the Act provides that a director may be held personally liable if they were knowingly a party to the carrying on of the company's business in a reckless or grossly negligent manner. This is a broad provision that can capture a wide range of conduct in a distressed company.
Reckless trading does not require intent to defraud — it captures conduct where directors continued to trade knowing (or ought to have known) that the company could not meet its obligations, without taking reasonable steps to address the distress. The personal liability that flows from this provision extends to the losses suffered by creditors as a result of the reckless conduct.
The Obligation to Consider Business Rescue
Section 129 of the Act creates an obligation on the board to convene a meeting to consider Business Rescue as soon as the company meets the definition of "financially distressed." Failure to do so — or worse, continued trading while financially distressed without any formal process — exposes directors to the risk that their conduct will be characterised as reckless or grossly negligent.
Importantly, the obligation to consider Business Rescue does not mean the company must automatically file. The board must genuinely consider whether Business Rescue is appropriate. But the failure to even convene that meeting and document the discussion is a significant risk factor in any subsequent claim against directors.
SARS and Director Liability
Tax debt deserves specific mention. Under the Tax Administration Act, SARS has the power to hold directors personally liable for certain tax debts of the company — particularly PAYE and VAT — where the director knew or ought to have known that the company would be unable to pay those taxes. This is a frequently overlooked area of director liability in South African corporate distress.
A director who allows SARS debt to accumulate while paying other creditors — or who takes money out of the business knowing that the company cannot meet its tax obligations — is at significant personal risk.
How to Protect Yourself
The best protection for a director in a distressed company is proactive, documented action. This means: convening board meetings to discuss the company's financial position, obtaining independent professional advice, documenting the board's deliberations and decisions, and — if appropriate — commencing a formal Business Rescue process.
A director who can demonstrate that they took reasonable steps in good faith, based on independent professional advice, is in a far stronger position than one who deferred action and hoped for the best. At MJBusiness Rescue, we provide independent solvency and liquidity assessments for boards that need an objective view of their position and their obligations.
Are you a director concerned about your personal exposure in a distressed company? Contact Mike for a confidential assessment.
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