Directors: Delinquency Declarations (And Other Dangers)

 

Directors – beware the additional risks and obligations imposed on you by the new Companies Act.  

 

In addition to an increased risk of incurring personal liability to creditors and other stakeholders, directors now also face the danger of being declared

“delinquent” or being placed under “probation” – in some cases even if they are merely negligent rather than deliberate in their non-compliance.

 

 

The delinquency declaration

 

This is not to be taken lightly! Serious transgressions may result in a lifetime ban from holding office (either as a director or as a “prescribed officer” – essentially a senior manager with “general executive control” in the company), whilst less serious misconduct will still attract a lengthy disqualification of at least 7 years. Offenders may also have to undergo “remedial education”, perform community service, and pay compensation to victims. 

 

Interested parties, such as shareholders, company officers, trade unions and employees, may apply to court for a delinquency order where a director is guilty of any of a wide range of misdemeanors – too numerous to list here, but largely falling into these broad categories: –

  • Acting or agreeing to act as a director or prescribed officer whilst disqualified or ineligible to do so (there’s a long list of disqualifying factors – take advice in doubt!).
  • Reckless, grossly negligent or fraudulent trading. 
  • Gross abuse of position, unlawfully taking personal advantage of company information or opportunities, inflicting harm on the company or a subsidiary either intentionally or by gross negligence, or generally acting in any manner amounting to gross negligence, willful misconduct, or breach of trust. 
  • Conviction for offences or incurring administrative fines or penalties – or being in control of a company so convicted or penalised. 
  • “Oppressive or prejudicial” conduct, or abuse of the company’s “separate juristic personality”. 

Probation

 

The lesser sanction of a “probation” declaration applies to a range of less serious categories of misconduct, is likely to involve at least partial disqualification for up to 5 years, and may entail supervision by a mentor, remedial education, community service and payment of compensation. 

 

Failure to pay creditors

 

Probation could also await anyone who – within any 10 year period – is or has been a  director of two or more companies, or a managing member of two or more CCs, that fail to pay creditors in full or to meet all their obligations (unless such failure relates to a business rescue plan or compromise with creditors). No longer therefore can a director trade with impunity in one company after another, liquidating each company when the going gets tough and leaving creditors to lick their wounds.

 

Indemnification

 

The new Act regulates the circumstances in which companies may indemnify directors and prescribed officers – take advice on how best to limit your risk profile in this regard, and check that you have appropriate insurance in place.

 

No escape

 

Resigning as director is no protection from these sanctions for misconduct – they can be used against an ex-director for up to 2 years.

 

Landowners: Will You Pay Less Tax, Or More?

 

When you sell property at a profit that is taxable, you will pay tax on either of two rates:-

 

1. Capital Gains Tax.  The lower rate and consequently first prize.  But CGT only applies if the proceeds are “capital” in nature – that is, if you are realising a capital investment; or

 

2. Income Tax. Where you are held to have been “trading” in the land, the proceeds will be treated as revenue, and taxed as income.  Generally a much higher effective rate than CGT, so very much second prize.

 

So – are you selling a capital asset or are you trading?  In very broad terms, if you buy a property intending to hold it as an investment for an extended period of time, you are likely to pay CGT – whereas if you buy it for resale, you are likely to pay income tax. 

 

However that’s a very simplified view – the distinction can be a fine one indeed, there is much room for confusion, and every case will be different. Some of the factors likely to be relevant are: –  

  • How in practical terms have you dealt with the property? 
  • What is/was your intention in buying/holding/selling it, and has that intention changed? 
  • How long have you held the property? Note that – contrary to popular perception – this factor isn’t in itself decisive, although it could well be relevant in showing what your intention in holding the property was.

A recent Supreme Court of Appeal decision confirms that, although your intention (and any subsequent change in intention) is relevant, the enquiry will go further. The court will also look at whether you are “actually trading, or carrying on a business, at the time of assessment” – a practical test with many pitfalls for the unwary.

 

The case in question related to the use of “asset realisation” companies, which have in the past been recommended to ensure that sale proceeds are treated as capital rather than as income. The SCA judgment has turned that advice on its head, the Court holding that the assets of realisation companies would be regarded as capital assets “only in special circumstances”; meaning that in most cases, using them may actually do more harm than good. 

 

There’s likely to be a lot at stake here (assessments of over R1.3m in the case in question!), and how you structure your property purchases and sales could be critical. Take advice upfront.

 

Blacklisting And The Defamation Danger

 

“Creditors have better memories than debtors” (Benjamin Franklin)

 

Credit providers:  You can in appropriate circumstances “blacklist” a credit consumer with a registered credit bureau, and this will not only alert other providers to a potential credit risk, it can also be a powerful incentive to a recalcitrant debtor to settle up. 

 

But there are risks here – the National Credit Act imposes strict requirements on you, and on credit bureau, in regard to the listing and retention of all credit-related records. 

 

A recent High Court case illustrates just one of the dangers of not complying. The Court awarded R50.000 in damages for defamation to an advocate whose reputation and ability to obtain credit were adversely affected by an incorrect listing with a credit bureau. He had been wrongly listed as having been “handed over” for a claim which was in fact disputed. Despite a warning from the advocate not to list him, the creditor proceeded to do so without advising him – he only learnt of the negative credit listing when a bank declined his application for an overdraft. 

 

Consumers:  If you find out that you have an adverse listing which is inaccurate or disputed – challenge it immediately, and seek legal advice if your reputation (or your financial position) is damaged in any way.