It rarely begins with a dramatic collapse. More often, financial distress creeps into a business quietly. A VAT payment is pushed to next month. PAYE is delayed because salaries have to be covered. The landlord can wait a week because a major debtor has promised payment. One supplier is paid while another is asked for “a little more time”. Before long, Peter is paying Paul – and Paul is getting impatient.
For business owners, knowing when a temporary cash-flow squeeze has crossed over into genuine financial distress is more than good financial management. Failing to recognise that shift can have serious legal consequences. And while South Africa’s latest liquidation figures have improved from earlier in the year, they remain a reminder of how quickly things can unravel.
In March 2026, liquidations jumped 15% year-on-year to 146, with 377 recorded during the first quarter. By July, the picture had moderated: Stats SA’s latest figures show 239 liquidations in July, down 23.2% year-on-year, while the first seven months of 2026 recorded 1,601 liquidations – 4.9% fewer than the same period in 2025.
When the juggling starts
PJ Veldhuizen, Managing Director of commercial law firm Gillan & Veldhuizen Inc. and a specialist in company law, insolvency and business rescue, says one of the clearest warning signs is when a business starts deciding which obligations it can afford to meet. “You pay the bond or the vehicle instalment, but you don’t pay the VAT. Then you miss another VAT payment, perhaps an instalment or the rent. Quickly the mountain becomes too high to climb,” he cautions.
A late payment on its own does not necessarily mean a business is doomed. But repeated missed payments, increasing reliance on overdrafts or shareholder loans, unpaid taxes, suppliers tightening terms, creditors issuing demands and an inability to meet commitments as they fall due should be the clarion call.
The mistake is assuming another good month will sort everything out. “Once you start missing your financial covenants, you need to stop and properly assess where the company stands,” says Veldhuizen. “Hope is not a turnaround strategy.”
Financial distress comes with responsibilities
The Companies Act does not permit directors simply to keep trading and hoping for the best. A company is regarded as financially distressed when it appears reasonably unlikely that it will be able to pay all its debts as they fall due within the immediately ensuing six months, or reasonably likely that it will become insolvent within that period.
Section 129(7) of the Companies Act is particularly important. Where a board has reasonable grounds to believe the company is financially distressed but chooses not to place it into business rescue, it must deliver written notice to affected persons explaining why. Those affected persons can include shareholders, creditors, employees and registered trade unions.
“That provision is largely overlooked,” says Veldhuizen. “But the moment the board knows the company is financially distressed, doing nothing is not a wise option. You need to consider business rescue, restructuring or another appropriate course of action – and you need good advice before the position deteriorates further.”
Business rescue is intended to facilitate the rehabilitation of a financially distressed company rather than simply closing its doors. Importantly, it is not synonymous with failure. It can provide breathing room to restructure debt, reconsider operations, negotiate with creditors or develop a plan capable of producing a better outcome than immediate liquidation.
When business risk becomes personal risk
Directors should also be wary of continuing business as usual when the numbers clearly say otherwise. Section 22 of the Companies Act prohibits a company from carrying on its business recklessly, with gross negligence, with intent to defraud or for a fraudulent purpose.
That becomes particularly relevant when directors know the company cannot meet its obligations but continue to incur debts, take deposits, order stock or make commitments without a reasonable prospect of paying them.
Potential liability may extend beyond the company. Section 218(2) of the Act provides for liability where a person contravenes the Act and another person suffers loss or damage as a result – although the application and scope of this section depend on the circumstances and relevant case law.
“Financial distress does not automatically mean personal liability for directors,” stresses Veldhuizen. “The danger lies in recognising the warning signs and then carrying on regardless. That is when difficult commercial circumstances can become a much bigger legal problem, and conduct can be considered reckless.”
Don’t wait for the fifth demand
There is often still room to manoeuvre when the first cracks appear. By the time SARS, the landlord, the bank and three suppliers are all knocking on the door, the available options may be considerably narrower. The Courts have indicated that business rescue is not for the terminally ill company.
The starting point is an honest assessment of cash flow, liabilities, creditor pressure and whether the underlying business remains viable. From there, directors can determine whether the answer lies in restructuring, negotiations with creditors, business rescue or, where recovery is no longer realistic, an orderly liquidation.
The real danger is not necessarily that a business finds itself in financial distress; businesses go through difficult periods,” concludes Veldhuizen. “It lies in recognising the signs and doing nothing about them. Get advice while you still have choices, because the longer you wait, the fewer choices you are likely to have.”
The numbers may warn you there is a problem. What you do next determines whether it becomes a crisis.