Justine Krige | Director | Corporate & Commercial Practice | Cliffe Dekker Hofmyer | mail me |
Zahrah Ebrahim | Associate Designate | Corporate & Commercial Practice | Cliffe Dekker Hofmyer | mail me |
As a bare minimum, directors are required to act in a manner which benefits the company – that is, to act in the company’s best interests.
This is entrenched in section 76 of the Companies Act which requires all directors, alternate directors and prescribed officers to act in good faith, in the best interests of the company and with the necessary degree of care, skill and diligence and prevents such persons from (1) abusing their position; and (2) knowingly causing harm to the company.
The recent case of OUTA v Myeni is illustrative of how not to act as a director. The court in that case found that Ms Myeni’s tenure as a director of South African Airways was replete with examples of conduct that was antithetical to the best interests of the ailing national carrier.
Section 162 of the Companies Act is intended to provide a remedy to interested parties to prevent the likes of Ms Myeni from occupying directorships. It allows a court to order that a director is ‘delinquent’ where they engage in serious misconduct and show themselves to be unworthy of the fiduciary duties they assume when appointed.
So, how is such an application brought against directors, and what are the consequences of being declared a delinquent director?
The delinquency application
An application can be brought by a company, shareholder, director, company secretary, prescribed officer, registered trade union or representative of a company’s employees.
Basically, the grounds relate to breaches of duty and non-compliance with the Companies Act. The grounds are, however, quite extensive and relate to a wide range of conduct on the part of the director.
An application can be brought against any director if: (1) such person is a director of a company, or was a director of the company in the preceding 24 months; and (2) such director (a) served or acted in the capacity of a director while ineligible, disqualified or under probation; (b) grossly abused their position; (c) took personal advantage of information or an opportunity; (d) intentionally, or by gross negligence, inflicted harm upon the company; (e) acted in a manner (i) that amounted to gross negligence, wilful misconduct or a breach of trust in relation to their duties; or (ii) in the name of or on behalf of the company without authority; carried on the company’s business in a prohibited manner; or was party to an act or omission despite knowing that such act had a fraudulent purpose. These were the grounds upon which Ms Myeni was found to be a delinquent director.
Delinquent, now what?
Being declared a delinquent director has implications which may endure for some time. In essence, a director will be barred from acting as a director of a company (or a category of companies).
As regards the period, depending on the nature of the conduct, directors can attract a delinquency declaration which lasts for the person’s lifetime; or lasts for seven years, or such longer period as determined by the court.
A court may also order that compensation be payable by a director to persons who were adversely affected by the director’s conduct.
A person who has been declared delinquent may apply to court to suspend the order of delinquency at any time more than three years after the order was made; or set aside an order of delinquency at any time more than two years after it was suspended. They must be able to persuade the court that they are capable of assuming a fiduciary position once more.
Directorship of companies, big or small, is ultimately a position of trust. The delinquency provisions in section 162 of the Companies Act offer protection to those persons who place their trust in directors so as to ensure against an abuse of power.
OUTA v Myeni is a welcome reminder that unscrupulous directors will no longer be tolerated by stakeholders, and that directors are to be mindful of the important fiduciary duties owed towards companies.
