Dealing with Delinquent Directors

For a more detailed synopsis, see the de Rebus article By Rehana Cassim.

A director who does not meet the standards of good behaviour and integrity expected of directors should not be allowed to continue to hold a directorship or should only be allowed to continue to do so under strict conditions imposed by a court.

Section 162 of the Companies Act 71 of 2008 sets out how to deal with delinquent directors. The section allows for a court, on application, to:

  • declare a director to be delinquent and thus disqualified from being a director of a company. The order may under certain circumstances be unconditional and subsist for the lifetime of the delinquent director or it may be conditional and subsist for seven years or longer, as determined by the court. Or it may require the director to undertake remedial education relevant to the nature of his conduct as a director or to carry out community service (s 162(10));
  • order the director to pay compensation to any person adversely affected by his conduct,
  • declare him to be under probation, and thus restricted to serving as a director subject to any conditions the court considers appropriate s 162(9)).  One condition may require that the director be supervised by a mentor in any future participation as a director while the order remains in force.

The Act allows an interested party to apply to court, including 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 and the Takeover Regulation Panel.

These provisions apply equally to delinquent members of a close corporation (see s 47(1)(c)) of the Close Corporations Act).

In Msimang NO and another v Katuliiba and others (11/23050) and in Kukama v Lobelo and Others (unreported case no 38587/2011) the South Gauteng High Court granted an order declaring the directors to be delinquent, and thus removing them as directors as, contemplated in section 162(5)(c)(iv)(aa). The rational for the orders was that the conduct of the directors fell short of the standard expected of directors and amounted to ‘willful misconduct or breach of trust…’

Grounds of delinquency

These are set out in s 162(5) of the Act, where a court ‘must’ make an order declaring a person a delinquent director if he, inter alia, consented to serve as a director, or acted in the capacity of a director or prescribed officer, while ineligible or disqualified to be a director in terms of s 69 of the Act, while a director, grossly abused this position, or acted in a manner that amounted to gross negligence, etc.

It is clear from the use of the word ‘must’ in s 162(5) that a court does not have a discretion whether to grant an order of delinquency if any of these grounds are established. In contrast, in terms of s 162(7) of the Act, a court ‘may’ declare a person under probation in the circumstances set out below and thus has a discretion whether to grant such an order.

Grounds of probation

In terms of s 162(7) of the Act, a court ‘may’ declare a person under probation if the person, inter alia, while a director, was present at a meeting and failed to vote against a resolution despite the inability of the company to satisfy the solvency and liquidity test, contrary to the Act, or while a director, acted in a manner materially inconsistent with the duties of a director, etc.

Application to suspend or set aside delinquency or probation order

The Act offers directors to apply to court to suspend the order of delinquency or to set aside the probation order (s 162(11)) if the applicant satisfies any conditions attached to the order and the court is satisfied that the applicant has demonstrated satisfactory progress towards rehabilitation and that there is a reasonable prospect that he will be able to serve successfully as a director of a company in the future (s 162(12)).

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