Directors of a company exercise a large amount of control over the company’s business affairs. The position of a director is legislatively controlled by the Companies Act No. 71 of 2008 (“Act”) and in particular, section 76 of the Act provides for the standards of conduct expected from directors, namely that directors must act in good faith and for a proper purpose and in the best interests of the company. The Act also mandates that directors must act with the degree of care, skill and diligence reasonably expected of a person carrying out the functions of a director. The provisions relating to section 76 of the Act place a fairly high standard on the conduct of directors and are reasonably extensive.
In the event that a director breaches his duty by failing to adhere to the standard of conduct set out in section 76 of the Act the director, apart from being held liable for any misconduct, can be declared a delinquent director and placed on probation or prohibited from being a director for a certain amount of time. Section 162 of the Act regulates the application procedure to declare a director delinquent or to place a director under probation. Applications in this regard can be made to the court by the company, shareholders, other directors, prescribed officers, or registered trade unions that represent the employees of the company.
Some of the grounds for declaring a director delinquent include gross abuse of the position of a director and taking personal advantage of information or opportunities that should have been those of the company. A director who, by gross negligence, inflicts harm on the company or who acts in a grossly negligent manner and wilfully misconducts himself or breaches the trust relationship in terms of the functions of and duty towards the company may also be declared a delinquent.
The reason for implementing section 162 of the Act is that when the conduct of a director breaches the bond of trust between the shareholders and the people they appoint to manage the company, the company is no longer seen to be in fit hands and the director no longer has the competency to hold office. Declaring a director delinquent serves the purpose of protecting those who deal with companies against directors who engage in the misconduct outlined above. Section 162 is therefore in the public interest as it serves to protect those who not only conduct business with a company but also those who have a vested interest therein.