Many first-time directors assume "limited liability" means they're always shielded from a company's debts. It doesn't. Understanding where the line sits — reckless trading, fraud, or knowingly ignoring insolvency — is essential for anyone sitting on a board, especially in a struggling business where the temptation is to keep trading and hope things improve.
Source: Companies and Intellectual Property Commission (CIPC)
Frequently Asked Questions
What counts as "reckless trading" under the Companies Act?
Continuing to trade when a company can't reasonably be expected to pay its debts as they fall due, without taking steps to address it.
Does this apply to non-executive directors too?
Yes — fiduciary duties and potential liability apply to all directors, not only those involved in daily management.
How can directors protect themselves?
By keeping proper minutes of decisions, seeking professional advice when the company is under financial pressure, and acting promptly, such as considering business rescue, rather than continuing to trade recklessly.