Director could be delinquent

Question:

My brother, sister and I are the directors of our family company.

My brother has never been one to live frugally and is continually spending the company’s funds and using company property for his personal benefit.

It has become so bad lately that we may lose the company if my sister and I do not put a stop to it.

We have discussed it with him, but all he says is that he is also a director and entitled to do what he is doing.

What can we do to stop him?

Answer:

The Companies Act 71 of 2008 (“Companies Act”) contains a mechanism whereby directors can take action to protect the in­terests of the com­pany in situations such as you have described.

Section 162 of the Companies Act allows for a director to be declared delinquent by an application to court.

Following an application to court, if there is sufficient evidence of one of the following circumstances, the court will declare the director to be delinquent:

  • If the director consented to serve as a director while he or she was ineligible to do so. For example, if the director was an unrehabilitated insolvent or if he or she has been convicted of certain crimes such as theft or fraud.
  • If a director has grossly abused the position of a director.
  • If a director took personal advantage of inside information or opportunities.
  • If a director intentionally or by way of gross negligence inflicted harm upon the company.
  • If a director committed any act which amounts to gross negligence, wilful misconduct or breach of trust in relation to the director’s functions or duties.

Case law has also provided guidelines as to what would constitute directorial delinquency.

In the matter of Kukama v Lobelo and Others, it was held that a failure to refund SARS is sufficient to render a director delinquent.

In Gihwala and Others v Grancy Property Ltd and Others the court held that the misuse of the company to reap personal financial benefits, a breached investment agreement or incomplete and inaccurate audited financial statements are further grounds for such delinquency.

In Lewis Group Limited v Woollam and Others, the court held though that ordinary, poor decision-making by a director is not enough to warrant delinquency.

In Hacker v Hartmann and Others, the court accepted that gross misconduct on the part of a director who is in a fiduciary position to the company constitutes delinquency.

Should the court find grounds for delinquency, the court can declare a director delinquent, which order, depending on the grounds for delinquency, could subsist for the lifetime of the delinquent director.

The delinquent director will also be disqualified from being a director of the company.

Through this mechanism, the Companies Act provides a way to ensure that directors remain accountable to the company, shareholders, fellow directors and employees.

It would be recommended that you and your sister consult with your attorney and discuss possible approaches towards addressing the conduct of your brother, including the possibility of bringing an application to have him declared delinquent.

– Carla Havenga, candidate attorney, Phatshoane Henney Attorneys

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