Reckless Trading

Reckless Trading

Written on 06/01/2018
Profmark Team


The recent Steinhoff and Gupta debacles have highlighted a number of issues, least of all Directors' Liability and other governance issues. But was the company itself trading recklessly?

A company must not carry on its business recklessly, with gross negligence with intent to defraud any person or for any fraudulent purpose. If the Companies and Intellectual Property Commission(CIPC) has reasonable grounds to believe that a company is engaging in reckless conduct or is unable to pay its debts as they become due and payable in the normal course of business, it may issue a notice to the company to show cause why the company should be permitted to continue carrying on its business, or to trade, as the case may be.
 
The company is required to provide information to CIPC within 20 business days of having received the notice. If the company fails to satisfy CIPC that it is not engaging in prohibited conduct or that it is able to pay its debts as they become due and payable in the normal course of business, CIPC
may issue a compliance notice to the company requiring it to cease carrying on its business or trading. The Commission could also accept the information and confirm the company’s right to continue carrying on business.
 
If a person to whom a compliance notice has been issued fails to comply with the notice, CIPC or the Executive Director (in the case of the Take-over Regulation Panel), as the case may be, may either:

  • Apply to a court for the imposition of an administrative fine, or
  • Refer the matter to the National Prosecuting Authority for prosecution as an offence in terms of section 214(3), but may not do both in respect of any particular compliance notice.

A director could still be subject to significant civil liabilities for any loss, damage or cost suffered by the company as a result of a contravention of section 22. Directors have a duty to initiate voluntarily Business Rescue Proceedings where it seems the company will become insolvent, so as to avoid the serious consequences contemplated in this section.
 
At the end of the day it is the Directors of a company that are ultimately responsible for the company's affairs. If you are a director of a company and would like to know more about your roles and responsibilities, please do not hesitate to contact us for professional advice in this regard.