Muhammad Talha Kazi | Secretariat Department
The recently published State Capture Commission Report arising from the findings of the Zondo Commission of Enquiry into State Capture has highlighted the need to hold errant directors to account for having grossly abused their fiduciary responsibilities.
The Report identified several directors of companies for further investigation and called for possible convictions by relevant authorities which may result in a court ruling that such directors be declared “delinquent”.
The implications of an order for delinquency have far reaching consequences. It is therefore important that directors of both private and public companies familiarise themselves with the legislation surrounding this topic.
Who is a “delinquent director”?
Section 162 of the Companies Act 71 of 2008 (Companies Act) deals with the topic of delinquency and states that a court must declare a director to be delinquent where they have failed to discharge their duties in terms of the Companies Act.
On what grounds can a person be declared a “delinquent director”?
Section 162(5) of the Companies Act contains a number of grounds on which a person may be declared a delinquent director. These include, inter alia, that a person, while a director:
- grossly abused the position of director;
- took personal advantage of information of an opportunity to gain an advantage for another person (other than the company on whose board the director serves) or to knowingly cause harm to the company or a subsidiary of the company;
- intentionally, or by gross negligence, inflicted harm upon the company or a subsidiary of the company; or
- acted in a manner that amounted to gross negligence, wilful misconduct or breach of trust in relation to the performance of the director’s functions within, and duties to, the company.
In a judgment delivered in the case of Organisation Undoing Tax Abuse and Another v Myeni and Others (case number 15996/2017), the High Court of South Africa declared Dudu Myeni, the previous non-executive chairperson of South African Airways SOC Limited (SAA), a “delinquent director” in terms of the Companies Act. The court found that Ms Myeni acted dishonestly, recklessly and with gross negligence and breached her fiduciary duties during the tenure of her directorship, causing significant harm to both SAA and the country as a whole.
Who may apply to have a person declared a “delinquent director”?
Action in terms of Section 162 can be taken by various parties, including:
- an aggrieved shareholder,
- a fellow director or prescribed officer of the company,
- company secretary,
- a registered trade union that represents the employees of the company, or
- any representative of the employees of the company.
What are the implications of being declared a “delinquent director”?
The implications of being declared delinquent are very serious and has far reaching consequences. A declaration of delinquency in terms of Section 162(6) –
The Court may, however, relax this order after three years and place the director under probation in terms of section 162(11)(a).
Directors declared delinquent are listed as such on the CIPC record which allows registered customers to search an individual’s directorship history prior to being considered for appointment on the board of a company.
In addition, the court may grant appropriate relief to the companies involved, who may consequently claim damages from a director for losses incurred as a result of their conduct.
The State Capture Report has highlighted the critical role that the Board of Directors play, and they can only do it if they are fully conversant with what their legal and fiduciary obligations entail. There is no doubt that directors of companies will have to carefully consider the manner in which they conduct the affairs of companies, particularly where there is the possibility of being declared delinquent.