Delinquent Directors – Act Sensibly or Face The Music
by Kristijan Madjarevic
Introduction
With the arrival of the new Companies Act No 71 of 2008 (hereinafter referred to as ‘the Act’) a little over a decade ago, a tool has been introduced to enforce needed checks and balances to regulate the powers and accountability of company directors and those that act as “delinquents”.
What are the Fiduciary Duties of Directors?
In terms of the common law, the fiduciary duties of directors require that a director act in good faith and in the best interests of the company. This means that he or she shall not use their position or information to, for example, gain advantage for anyone other than the company, cause harm to the company, signing or approving false or misleading financial statements and failing to vote against any prohibited acts. A significant improvement under the Act is that it allows for a court application to affirm a director delinquent or to have him or her placed under an order of probation.
The Scope of Section 162 of the Act
Section 162 of the Act is a remedy available to shareholders and certain investors to hold directors liable and answerable for their actions. The reasoning behind this remedy is that a director who is guilty of severe abuse of his or her position and contravenes his or her fiduciary duties should not be permitted to remain in their respective roles.
Under the said provision, a director may only continue to act as such under stringent conditions imposed by a court. Whenever a court finds that a person contravened Section 77(3)(a), (b) or (c), a court must make an order declaring such a person as delinquent in terms of Section 162(5)(c)(iv). This section is worded in definite terms, in other words, there is no alternative.
This means that such a person, in addition to being personally liable for the company’s debts, will not be allowed to act as director of any company again for a period of at least seven years, subject to certain conditions imposed by the court (such as limiting the delinquency to a particular category of companies (Section 162(6)(b)).
Who can apply for an order declaring a director delinquent?
Section 162(2) of the Act states who has the necessary authority to bring an application to court declaring a director delinquent or placing him or her under probation. Such includes: a company, a shareholder, a director, a company secretary or prescribed officer of a company, a registered trade union that represents employees of a company or another employee representative, the Companies and Intellectual Property Commission (CIPC) and the Takeover Regulation Panel.
Grounds of Delinquency
The Act contains a number of grounds on which a person may be declared a delinquent director, which are as follows:
- grossly neglected the position afforded to them as director;
- utilising information for personal gain or to gain an advantage for another person (other than the company on whose board the director serves) or to significantly cause damage to the company or a subsidiary;
- deliberately, or by gross negligence, wreaked damage upon the company or a subsidiary; or
- acted in a manner that amounted to gross negligence, deliberate misconduct or breach of trust in relation to the implementation of the director’s functions and duties within and owed to the company.
Case Law on Delinquent Directors
In Gihwala and Others v Grancy Property Ltd And Others,[1] the directors tried to confront the constitutionality of Section 162(5)(c) on the grounds that it infringed Section 22 of the Constitution because it limited their constitutional right to clearly choose their trade, occupation or profession.
The court overruled this argument stating, that Section 162(5)(c) serves –
‘to protect the investing public against the type of conduct that leads to an order of delinquency, and to protect those who deal with companies against the harm caused by the misconduct of delinquent directors. Section 162 was an suitable and fair way to achieve such a purpose.’
The court also held that conduct covered by Section 162 committed before the new Act came into effect, could also lead to a director being declared delinquent.
In May 2020, in Organisation Undoing Tax Abuse and Another v Myeni and Others,[2] Judge Tolmay of the High Court of South Africa declared Dudu Myeni, the former non-executive chairperson of South African Airways SOC Limited (hereinafter referred to as ‘SAA’), a delinquent director in terms of the Act. An order of delinquency is usually meant to last for a minimum of seven years. However, given Ms Myeni’s conduct, the court found it necessary to impose a lifelong delinquency order.
The court held that Miss Myeni had acted untruthfully, recklessly and with gross negligence and further had breached her fiduciary duties during the duration of her term as director, causing substantial damage to SAA and the reputation of the country as a whole.
Conclusion
The relevant provisions of the Act, the above-mentioned case law and the application of the common law principles have drastically escalated the expected level of directors’ duties and their conduct to companies in South Africa.
Directors who find themselves on the receiving end of such an order are highly unlikely to be selected or even appointed to any other company’s board in the future. Individuals in such fiduciary positions need to continuously consider and evaluate whether they are adhering to their duties sensibly, or face the music.
[1] Gihwala and Others v Grancy Property Ltd And Others 2017 (2) SA 337 (SCA).
[2] Organisation Undoing Tax Abuse and Another v Myeni and Others,[2] (15996/20170) [2020] ZAGPPHC 169.