In a strained economy where many businesses are battling to keep their doors open, it has become increasingly important for directors of companies to be vigilant in the performance of their duties as prescribed by the Companies Act (71 of 2008).  Their responsibilities and risk of personal liability requires them to be well versed in the provisions of the Companies Act, especially when it comes to reckless trading. 

The duties and responsibilities of directors in terms of the Companies Act include, among others, the following:

  • acting in good faith and for a proper purpose,
  • acting in the best interest of the company,
  • acting with a degree of care, skill and diligence that may reasonably be expected of a person in a like circumstance.

Failure to adhere to these principles may result in Section 77 coming into play whereby a director shall be liable for any loss, damages or costs sustained as a direct or indirect consequence of the director knowingly having been party to an act or omission that resulted in defrauding a creditor, employer or shareholder of the company.

In terms of S22 of the Companies Act (71of 2008) the company may not carry on its business recklessly, or with gross negligence.  Trading under insolvent circumstances is also reckless trading in terms of S22.

In light of the above obligations, a director must do everything possible to mitigate loss to the company stakeholders as well as the risk of personal liability.  Simply put, he/she should know how to avoid reckless trading.  The following are a few guidelines:

  1. When liquidity is under pressure or the balance sheet is indicating possible insolvency, all directors should be increasingly vigilant and closely involved with the business turnaround and careful monitoring of the company’s activities and possible risks that it faces.
  2. Directors must ensure that they are complying with the minimum standards of corporate governance (as described in the King III Code), including holding regular board meetings and keeping proper minutes of such meetings to evidence the rationale for discussions taken.
  3. Directors should ensure that there is a system in place for implementing decisions and a follow up process to examine the impact of these decisions.
  4. The company’s accounting records should always be accurate and up to date.
  5. Directors should also prepare realistic budgets and projections and the company’s performance should be compared to such budgets and significant variances immediately investigated.  Should a revision of the existing budgets and forecast be necessary, these must be adjusted to ensure that a true picture of the company’s future is painted in advance of possible financial crisis presenting itself.
  6. Directors should consult with experts as soon as the need arises.

In conclusion, a director should always be up to date with the legislation affecting the company, and should be knowledgeable about the company’s affairs so as to service the company’s stakeholders (including shareholders, employees and creditors) effectively and to avoid any loss being incurred by them.

Nicci Weymouth

Senior Accountant, Durban