South Africa: Reckless Trading Amidst Covid-19 and a Challenging Economic Climate

published on 16 April 2021 | reading time approx. 2 minutes

Section 22(1) of the Companies Act states that a company must not carry on its business recklessly, with gross negligence, with intent to defraud any person, or for any fraudulent purpose.

Should CIPC have reasonable grounds to believe that a company is engaging in any conduct as stated above or is unable to pay its debts as it becomes due and payable in the normal course of business, CIPC may issue a notice to the company to show cause why the company should be permitted to continue carrying on its business.

The Companies Act further states that a director of the company will be liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of that director:

having agreed to the carrying on of the company’s business despite knowing that it was being conducted in a manner prohibited by section 22(1) of the Companies Act; or
being party to an act or omission by the company despite knowing that the act or omission was calculated to defraud a company creditor, employee or shareholder, or had another fraudulent purpose.

Accordingly, when a company continues to incur debts, when a reasonable person would conclude that there could be no reasonable prospect of the company’s creditors receiving payment when due, it can be assumed that the company is conducting business recklessly and/or negligently as contemplated in section 22(1) of the Companies Act.

Section 214 of the Companies Act further states that a person is guilty of an offence if that person was knowingly a party to an act or omission by a company, calculated to defraud a creditor of the company.

When the board has reasonable grounds to believe that the company is financially distressed (it appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months or it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months) and decides not to resolve to place the company in business rescue, the board must deliver a written notice to all affected persons, confirming that the company is financially distressed and the reasons why the board has not adopted a resolution to place the company in business rescue.