The Companies Act 71of 2008 provides for a court application to declare a director delinquent or have him placed under an order of probation, specifically section 162.

The Act allows the following ‘persons’ to make such application: a company, a shareholder, director, company secretary, prescribed officer, a registered trade union representing employees of the company or another representative of the employees of a company. The Commission, the Panel as well as any organ of state responsible for the administration of any legislation may also make such an application under certain circumstances.

Any declaration made by the court may be made subject to any conditions that the court considers appropriate, including conditions limiting the application of declaration to one or more particular categories of companies.

The order of delinquency made in terms of section 162(6)(a) is unconditional and lasts for the lifetime of the person concerned therefore it can have dire consequences on a directors career.

DELINQUENCY

The grounds under which a director can be declared as such under s162(5) a court must make an order declaring a person a delinquent director if he:

  • 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 s69 of the Act;
  • Whilst under probation acted as a director in a manner which contravened the probation order.
  • While a director, grossly abused this position;
  • While a director, contrary to s76(2)(a) of the Act, took personal advantage of information or an opportunity, or intentionally or by gross negligence inflicted harm on the company/subsidiary;
  • While a director acted in a manner that amounted to gross negligence, wilful misconduct or breach of trust;
  • Has repeatedly been subject to a compliance notice or similar enforcement mechanism;
  • Has at least twice been personally convicted of an offence or subjected to an administrative fine or penalty in terms of any legislation; or
  • Within a period of five years, was a director of one or more companies or was a managing member of one or more close corporations, or controlled or participated in the control of a juristic person (irrespective of whether concurrently, subsequently or at unrelated times) that was convicted of an offence or subjected to an administrative fine or similar penalty in terms of any legislation.

nosePROBATION

A probation order may be subject to any conditions the court considers appropriate and subsists for a period not exceeding five years. If a person is placed under probation he or she is to be supervised by a mentor in any future participation as a director while the order remains in force or be limited to serving as a director of a private company or of a company of which that person is the sole shareholder.

Grounds for Probation in terms of s162(7) of the act state a court ‘may’ declare a person under probation if the person while a director

  • 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.
  • Acted in a manner materially inconsistent with the duties of a director
  • Acted in or supported a decision of the company to act in a manner that was oppressive or unfairly prejudicial to the interests of a shareholder or other director
  • Has, within a period of 10 years after the Act came into effect, been a director or managing member of more than one company or close corporation and during that time two or more of these entities each failed to fully pay all off its creditors or meet all of its obligations. (This is intended to curb the serial abuse of limited liability whereby directors trade in one entity after another and liquidate them when they cannot pay their debts).

In addition to a declaration of delinquency or probation, the court may require the person concerned to:

  • Undertake a relevant programme of remedial education.
  • Carry out a designated programme of community service.
  • Pay compensation to any person adversely affected by his conduct as a director.
  • Furthermore, in the case of probation, the court may require the person to be:
  • Supervised by a mentor in any future role as a director, while the order remains in force.
  • Limited to serving as a director of a private company, or of a company of which he is the sole shareholder.

Once a director has been declared a delinquent or subject to an order of probation, they may subsequently apply to court to suspend the order of delinquency and substitute an order of probation, with or without conditions, at any time more than three years after the order of delinquency was made or to set aside an order of delinquency at any time more than two years after it was suspended, or an order of probation at any time after such order was made.

This will not be available to a person declared delinquent on account of having consented to serve as a director whilst ineligible or disqualified under the 2008 Act or whilst under a probation order in terms of the 2008 Act or the Close Corporations Act and acted in a manner that contravened that order.

SECTION 162 BECOMES A REALITY

In Kukama v Lobelo [2012] ZAGPJHC 60 is the first reported decision in which a person has been declared a delinquent director.

In the case of Kukama vs Lobelo, Peolwane Properties (Proprietary) Limited, Diphuka Construction (Proprietary) Limited and CIPC, South Gauteng High Court, Johannesburg, 12 April 2012, the presiding judge ruled that the director concerned had contravened Section 22 (reckless trading) and Section 76 (standards of directors conduct) of the Act.

The guilty director had, inter alia, allowed funds (some R2,2 million) destined for the company to be paid into an alternative account to the detriment of the company, had failed to detect a fraud on SARS in the sum of R39 million and had further failed to alert his co-director and co-shareholder of such fraudulent transactions.

The court held that the conduct of such director did “not measure up to the standard required and expected of a director” and as a result found that he was in breach of his fiduciary duties to the company. Further, Section 76(2)(b) of the Act created a duty on the part of a director to communicate at “the earliest practicable opportunity any information that comes to his attention to the board”, which he failed to do.

The court held that the director’s conduct was grossly negligent, constituted wilful misconduct, a breach of trust and a gross abuse of his position as a director. As a result, the court ruled that the director should be declared delinquent in terms of Section 162 of the Act. The court further granted leave to the company that had suffered damages as a result of the director’s conduct to institute legal proceedings for such losses against the director personally.

In Conclusion, directors need to consider whether they are fulfilling their duties, or face an order of delinquency with all of its negative and unfortunate consequences.