FACTS

Applicant (Kukama ) applied for first respondent ( Loselo ) to be declared a delinquent director and for this removal as director of Peolwane Properties (2nd respondent ) and Diphuka Construction ( 3d respondent ), of which the applicant and respondent are each 50% shareholders. They are both directors of Peolwane Properties Ltd, and the first respondent is sole director of Diphuka Construction Ltd.

SARS made 2 payments of R22 million into the bank account of Diphuka Construction. These payments were rebates from SARS due to Peolwane Properties Ltd (of which both are directors) and not to Diphuka Construction Ltd. It turns out that the payment of R39 million was not due at all and had not been repaid. The amount of R22 million was never transferred into the correct account of Peolwane Properties Ltd.

Royal alliance was engaged by the first respondent, without the consent of the applicant as a director and shareholder to handle the tax affairs which led to the payments from SARS.

LEGISLATION

In terms of the new companies Act, of the following provisions are relevant:

S22 prohibits reckless trading. 

S76(2)(a) prohibits a director from abusing his position to gain advantage or to cause harm to the company and (b)mandates a director to communicate as early as possible, any info that comes to the directors attention.

In terms of S76 (3) a director of a company must perform the functions of director,

  • (a) in good faith and for a proper purpose,
  • (b) in the best interest of the Company and
  • (c) the degree of care, skills and diligence that may be expected.

S 77 (3) imposes liability on a director for any less damages for actions which he

  • (a) lacked the authority to do,
  • (b) is prohibited by Sh2 (reckless trading) or is fraudulent.

S162 (5) mandates a court to declare a person to be a delinquent director if the person while director is guilty of any of the above mentioned provisions.

JUDGEMENT

The court found interalia that the first respondent had allowed money destined for the second respondent to be paid into an account other then that of the second respondent; failed to detected the fraud to SARS for the benefit and interest of other companies; failed to alert his co-director and co-shareholder of the fraudulent transaction and repayment by SARS into a account over which the applicant holds no directorship.

The first respondent had this violated all of the above mentioned sections, specifically (S22, S76(2), S76(3)) and in terms of S162(5) was declared a delinquent director. Further more in terms of S162(3) the applicant was granted leave to institute legal proceedings against the first respondent for the payment of the R22million on behalf of the second respondent. The first respondent had failed to meet the standard expected of a director, due to willful misconduct, breach of trust and a gross abuse of position of a director.

Effect of an order declaring a director delinquent.