GUIDES
By InsidEntity Editorial Desk · Sep 18, 2026 · 4 min read
Reckless trading, statutory claims, delinquency orders and the circumstances that pierce the corporate veil.
The corporate veil exists precisely to separate a company’s liabilities from the personal assets of the people who run it. That separation is the default, not a guarantee, and a specific set of circumstances can pierce it. Four matter most: reckless or fraudulent trading, breach of statutory duties, delinquency, and personal guarantees a director signed voluntarily.
Reckless or fraudulent trading
Most jurisdictions with a modern companies act make it a specific offence to carry on a company’s business recklessly, with intent to defraud creditors, or for any fraudulent purpose. South Africa’s Companies Act, in section 22, prohibits carrying on business recklessly or with gross negligence, and a director found to have done so can be held personally liable for the resulting losses.
The test turns on what the director knew or should have known, not on whether the company ultimately failed. A company can fail for entirely ordinary commercial reasons, market conditions, a lost contract, a competitor’s better product, without any director incurring personal liability. What creates exposure is continuing to trade, and to incur new obligations to new creditors, after a director knew or ought reasonably to have known that the company could not meet those obligations.
Breach of statutory duties
Directors owe duties that exist independently of any contract, set out in most jurisdictions’ companies legislation. South Africa’s Companies Act, in section 76, requires a director to act in good faith, for a proper purpose, in the best interests of the company, and with the degree of care, skill and diligence that may reasonably be expected of someone with that director’s knowledge and experience.
Section 77 attaches personal liability to a breach of several of these duties, and to specific conduct including trading recklessly, acquiescing in the company carrying on business in a manner prohibited by the Act, or being party to an act intended to defraud a creditor, employee or shareholder. This is the mechanism section 218 damages claims run through: a person who suffers loss as a result of a contravention of the Act can claim damages from the party responsible for it, which can include a director personally.
Delinquency and probation orders
Beyond financial liability, a director can be declared delinquent, which bars them from serving as a director at all, for a minimum period set by statute and in some cases indefinitely. Grounds typically include grossly abusing the position of director, causing serious loss to the company through conduct that amounts to gross negligence, wilful misconduct or breach of trust, or having been party to conduct proscribed by the companies legislation.
A delinquency order is a different and generally more serious consequence than a damages claim. It does not require the applicant to prove a specific quantum of loss. It requires proving the conduct, and the consequence is exclusion from the role rather than a bill.
Personal guarantees
The most common route to personal liability has nothing to do with wrongdoing at all. A director who personally guarantees a company’s overdraft, lease or loan facility, which lenders and landlords routinely require from directors of smaller and newer companies, has voluntarily made themselves liable for that specific obligation regardless of how well or badly the company was run. This is a contractual liability, not a statutory one, and it survives even a company that failed for entirely blameless reasons.
What does not create personal liability
Ordinary commercial misjudgement, made in good faith and with reasonable care, is exactly what limited liability is designed to protect. A director who makes a decision that turns out badly, having applied appropriate care and having acted in what they reasonably believed was the company’s best interest, is protected by the same business judgment principle that appears in some form across most companies legislation. The law distinguishes between a bad outcome and a bad process, and it is the process that creates or removes liability.
This distinction is also why a director’s track record across previous companies is a genuinely informative signal rather than background noise. A pattern of directorships ending in liquidation, reckless trading findings, or delinquency proceedings is different in kind from a single company that failed once in a difficult market, and the difference is exactly the one the law itself draws.
Why this belongs in a governance assessment
InsidEntity’s Company Risk Rating scores director independence and director capacity from board composition and appointment history precisely because who sits on a board, and what their record elsewhere looks like, is information a company’s own marketing cannot be relied on to disclose. The full methodology sets out how those pillars are built. Search a director to see their full board history before assuming a company’s governance is what its website says it is.
Independent research. Not financial advice. This is general information, not legal advice, and does not account for the specific facts of any situation. No allegation of wrongdoing is made against any individual or entity named.
Know more. Risk less. Decide better.
Sources: Companies Act 71 of 2008 (South Africa), sections 22, 76, 77 and 162; Companies and Intellectual Property Commission (CIPC) guidance on director conduct; InsidEntity Company Risk Rating methodology.
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