The advent of the 2011 Companies Act brought about a new remedy in the governance of South African companies, namely the application for directors to be declared delinquent or to be placed under probation, upon failure to discharge their duties as directors.
Part of the ongoing legal tussle between Old Mutual and its twice-dismissed CEO, Peter Moyo, entails an application by Moyo to declare the members of the Old Mutual board and his main protagonist, board chair Trevor Manuel, delinquent in terms of the Companies Act for their handling of his now-contested removal.
Meanwhile, OUTA and the Pilots Association have attempted the same with erstwhile chairperson of SAA board, Ms Dudu Myeni, who is screaming and kicking her way to the court. The case has been delayed for several months, and Myeni herself has been scarce.
Earlier this year, Corruption Watch launched a delinquency application in the High Court regarding the former CEO and CFO (Brian Molefe and Anoj Singh) for their role in the now widely-publicised dealings within Eskom. It remains to be seen whether this will succeed.
How it works
Section 162 of the Companies Act compels the courts to declare a director delinquent or place them under probation for, among other things, gross abuse of the position of director; taking personal advantage of information or opportunities of the company; intentional or gross negligence which inflicts harm on a company or its subsidiaries; or in the event that a director is personally convicted at least twice of an offence in terms of any legislation.
Barring the straightforward two personal convictions, the remainder of the grounds upon which a director may be declared delinquent will vary on a case-by-case basis. To demonstrate gross abuse of a position of a director, intentional or gross negligence and other grounds contemplated in the Companies Act will necessarily depend on the facts and circumstances of each case.
Since the coming into effect of Section 162 of the Companies Act, several cases of delinquency have been decided upon by our courts. Some of the examples where directors were declared delinquent are instructive, and make it clear that delinquency will be ordered under circumstances which generally involve dishonesty on the part of directors and typically cause a damage of a financial nature.
In what was likely the first decided case of on delinquency in the case of Msimang N.O and Another vs. Peter John Katuliiba and Others, the court declared the directors of Memeza-QRX (Pty) Ltd delinquent for failure to cause the preparation of annual financial statements and to convene the statutory annual general meetings of the company for several years.
On 31 May 2013, the issue came up before the South Gauteng High Court in the case of Lobelo and Others vs. Kukama and Others.
In this case, the directors of the company sought to declare their fellow director a delinquent director for, among other things, making fraudulent claims for tax refunds from SARS in the name of the company, and also for diverting tax refunds that were due to the company to other entities that Kukama controlled.
This was a clear case of financial misconduct and the court did not hesitate to declare Kukama a delinquent director in the circumstances.
On 24 March 2016, the Supreme Court of Appeal upheld the decision of the Western Cape High Court declaring Mr Dines Gihwala and Mr Lancelot Manala delinquent.
This case involved the exclusion of shareholders whom the court found to have duly paid for their shares in the company’s affairs as shareholders, undue payments made for the benefit of the implicated directors and failure to produce accurate financial statements.
The court, in declaring the two delinquent, had harsh words, and concluded that the conduct of the directors was calculated to enrich themselves financially.
It is noteworthy that in this case, whereas the implicated directors contended that the provision of Section 162, which empowers the courts to declare directors delinquent, was unconstitutional - because among other things, it violates their rights to freedom of trade, occupation and profession - the court took the position that it was necessary to protect investors and the general public against directors who conduct affairs of companies in a grossly negligent manner. In this case in particular, the conduct was motivated by personal financial gain.
In August 2019, the North Gauteng High Court declared delinquent the former executives of the Public Investment Corporation, who were appointed by the PIC onto the board of VBS Bank for their role in the events that lead to the demise of the bank. These directors are also alleged to have benefitted financially from the ill-gotten proceeds of VBS Bank.
Understanding the history
It is clear from these examples that the courts will be inclined to declare directors delinquent where there is demonstrable financial misconduct or flagrant disregard of the provisions of the Companies Act.
Some have tried unsuccessfully to resolve boardroom differences by threatening directors with an application of delinquency. There are examples of these were the courts have rejected such and implored the directors and their stakeholders to resolve their differences through other mechanisms available in the Companies Act.
Any person who seeks to declare the other a delinquent director will do well to carefully consider whether such application meet the prescripts of Section 162 of the Companies Act. Where this is not the case the courts will have no reason to use the declaration of delinquency as a measure to resolve company differences.
Matodzi Ratshimbilani is an attorney and director of Tshisevhe Gwina Ratshimbilani Inc. Views expressed are his own.