DELINQUENT DIRECTOR: CONSEQUENCES

The fiduciary duties of a company director are found in section 76 of the Companies Act 71 of 2008 (“the Act”) and the common law.

The King Report and Code of Corporate Governance generally referred to as “King III”, further qualify these duties.

The fiduciary duties require a director to exercise powers, and perform functions in: 

• good faith and for a proper purpose;
• in the best interest of the company; and
• with the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions in relation to the company as those carried out by that director.

Breach

A breach of fiduciary duties by a director could unlock the possibility of a director being prosecuted with the full might of the Act in having been declared delinquent in terms of section 162, which undoubtedly brings dire consequences.

The instances on when a court must and will declare a director delinquent is where:

1. a director consented to serve as a director, while ineligible or disqualified under the Act, or while under a probation order in terms of the Act or the Close Corporations Act and acted in a manner that contravened that order;
2. grossly abused the position of a director;
3. intentionally, or by gross negligence, inflicted harm on the company or a subsidiary of the company;
4. acted in any manner amounting to gross negligence, wilful misconduct or breach of trust in relation to the performance of such director’s duties.

Case in point

A recent Supreme Court of Appeal judgment in Gihwala v Grancy Property Ltd [2016] 2 All SA 649 (SCA) by a full bench elucidated on the requirements delinquency. The appeal concerned, inter alia, relief against an order granted in the Western Cape High Court in declaring two directors in question delinquent in terms of section 162 of the Act.

The directors sought for their own personal enrichment to the detriment of their company, upon entering into a transaction to secure a 58% interest in a Special Vehicle Company, which had been incorporated by a property loan stock company listed on the Johannesburg Stock Exchange for the purpose of expanding their shareholder base within the Black community for Black Economic Empowerment Purposes.

They used repaid amounts of loans to their company to invest in a separate business venture to secure 50% profit; issued payment to themselves of the full amount of the first dividend received from the SPV in excess of R5 million; issued director’s fees of R750,000 each from the SPV to the detriment of SMI; issued director’s fees of R2.75 million from SMI together with surety fees in excess of R1 million.

Declaration

Declaring a director delinquent is to ensure those who invest in companies, big or small, are protected against directors who engage in serious misconduct.

An application for delinquency can therefore only succeed in instances of serious misconduct engaged by a director whereby having breached its fiduciary duties.

Directors must consider whether they are adhering to their duties carefully or face an order of delinquency.

Jaime-Lee Jacobs | Candidate Attorney, Herold Gie Attorneys |  http://www.heroldgie.com/ | jjacobs@heroldgie.co.za |