The Reckless Trading Risk: What D&O Insurers Should Know About Director Liability

Introduction

A September 2026 High Court judgment has reaffirmed and applied the statutory framework for holding company directors personally liable for reckless trading and conduct calculated to defraud creditors. The matter concerned a plaintiff, a private company in the business of marketing and selling process control instrumentation, which had appointed the third defendant as a non-exclusive distributor of its products. The first defendant was at all material times a director and principal managing officer of the third defendant, while the second defendant was also a director throughout the relevant period.

The third defendant purchased the plaintiff’s products on credit and resold them to end-users in the mining sector. Over time, it accumulated substantial arrears and continued to place purchase orders despite an acknowledged inability to service its debts, ultimately generating 59 unpaid invoices totalling R2 832 601,73 between December 2019 and April 2021. The third defendant was voluntarily liquidated by special resolution in August 2021, with its assets far short of its liabilities. The plaintiff thereafter sought to hold the first and second defendants personally liable for the full outstanding debt, relying on the statutory mechanisms for director liability under the Companies Act 71 of 2008 and, in the alternative, the Companies Act 61 of 1973.

This judgment adds to the growing body of important directors and officers (“D&O”) jurisprudence in South Africa and carries significant implications for D&O insurance providers, particularly in the context of claims arising from reckless trading, conduct calculated to defraud creditors, and the personal exposure of directors who remain passive in the face of known insolvency.

Main issues for determination

The court was required to determine whether the third defendant’s business had been carried on recklessly in contravention of section 22(1) of the Companies Act 71 of 2008, and whether the first and second defendants, as directors, were knowingly a party to that conduct. The court further had to consider whether the first and second defendants, or either of them, were knowingly a party to conduct by the third defendant calculated to defraud the plaintiff as a creditor, in contravention of section 214(1)(c) of the Companies Act. If those contraventions were established, the court needed to assess whether civil liability arose under section 218(2) of the Companies Act. In the alternative, the court was asked to determine whether the defendants were personally liable under section 424(1) of the Companies Act 61 of 1973, which is preserved by Schedule 5 of the Companies Act in respect of companies wound up under the old regime. Finally, if personal liability was established, the court was required to assess whether the quantum of that liability extended to the full sum of R2 832 601,73 together with interest.

Findings and reasons

The court commenced its analysis by setting out the applicable legal principles. Section 22(1) of the Companies Act prohibits a company from carrying on its business recklessly, with gross negligence, with intent to defraud, or for any fraudulent purpose, although the prohibition is directed at the company as a legal entity and does not create personal liability for directors in its own right. Drawing on the Rabinowitz case, the court confirmed that the test for recklessness is objective: a company trades recklessly when, in the opinion of a reasonable businessman standing in the shoes of the directors, there would be no reasonable prospect of creditors receiving payment when due. Section 22 serves as the predicate condition for the offence created by section 214(1)(c), which the court, relying on the Ozinsky and Philotex cases, confirmed does not require proof of all elements of common-law fraud but rather knowledge and participation in conduct with the objective tendency to cause financial prejudice to a creditor. Importantly, civil liability under section 218(2) arises upon the commission of the section 214(1)(c) offence, creating a lex specialis (law governing a specific subject matter) right of recovery without the plaintiff needing to prove the common-law elements of delict independently.

Turning to the facts, the court found that the third defendant carried on its business recklessly throughout December 2019 to August 2021, characterising the evidence as “compelling and overwhelming” and “a textbook example of a company incurring debts with no reasonable prospect of repayment”. The first defendant had actual, direct knowledge of the third defendant’s financial difficulties from at least November 2019, when he personally signed a payment plan acknowledging accumulated debt of approximately R6 521 341. Despite this knowledge, the third defendant continued to place 59 further purchase orders on 30-day credit terms, generating the full amount of the claim, while the anticipated funding was never secured and no payments were made on the post-November 2019 invoices.

The court found the first defendant liable under section 214(1)(c) on two grounds. First, the retention of client payments already received for the plaintiff’s products and the continuation of ordering on credit without remitting the funds already collected constituted conduct calculated to defraud the plaintiff as a creditor. Second, the preferential repayment of director loans from the company’s business account, in the absence of board resolutions or written loan agreements as required by section 45 of the Companies Act, while the plaintiff’s invoices remained entirely unpaid, constituted a knowing and unsanctioned preference of the director’s interests over those of the principal trade creditor. An unexplained R450 000 transfer from the company’s business account five days before the first defendant’s purported withdrawal from the distribution agreement further supported this finding.

The court rejected the first defendant’s principal defence that the appointment of a new competing channel partner by the plaintiff was the proximate cause of the third defendant’s failure, holding that the non-exclusivity clause in the distribution agreement expressly permitted such appointments, that the debt had been accumulating for 18 months before any competing distributor issue arose, and that the first defendant’s own written admissions acknowledged financial distress that preceded any new distributor announcement. The COVID-19 defence was likewise dismissed, as the reckless trading pattern was established from December 2019, before the pandemic reached South Africa.

Regarding the second defendant, the court drew an adverse inference from her failure to testify without explanation, applying the principle established in the Stellenbosch Farmers’ Winery case. As co-director and co-owner of a closely held, two-person directorial structure, the court found that she was in a position to know of the company’s financial affairs and had knowingly acquiesced in the reckless trading. However, the court exercised appropriate caution and declined to make a section 214(1)(c) finding against her, holding that the specific acts of conduct calculated to defraud were attributable primarily to the first defendant. Her liability was accordingly grounded solely on section 22 read with section 218(2) of the Companies Act.

Both defendants were found jointly and severally liable for R2 832 601,73.

Conclusion

This judgment is of particular relevance to D&O insurance providers for several reasons. It demonstrates that the statutory framework under sections 22, 214(1)(c), and 218(2) of the Companies Act provides creditors with a potent mechanism to pursue directors personally, one that does not require proof of common-law fraud and creates liability upon the commission of the statutory contravention alone. The case illustrates that the threshold for “conduct calculated to defraud” can be met by patterns of trading behaviour — such as retaining client payments while continuing to order on credit, or preferring director loan repayments over trade creditors — rather than only through discrete acts of dishonesty. The differentiated treatment of the two defendants is equally instructive: even a director who does not personally participate in the specific fraudulent conduct may face personal liability for reckless trading on the basis of knowing acquiescence, particularly in closely held companies where an adverse inference may be drawn from a failure to testify.