The news and social media have been fraught with reports of corruption, State Capture, misappropriation of funds, poor corporate governance and lack of governance in general. There have also been more frequent reports of court applications to declare a company director delinquent. A familiar story may be that of Peter Moyo, ex CEO of Old Mutual, who filed an application to declare Old Mutual’s full board as delinquent directors. The former South African Airways board chairperson, Dudu Myeni, has also had her name bandied about in the media for being declared a delinquent director for life. But what exactly is a delinquent director?
The purpose of the delinquency remedy, as envisaged in the Companies Act 2008 (the Act), is to protect shareholders, stakeholders and the public from incompetent and dishonest directors. The company shareholders are those people (or other companies) that have invested funds into that company, while a stakeholder is basically anyone else with an interest in the company – be it a supplier, employee, the employee’s family, the community at large, the environment, and so on. Delinquent directors would have demonstrated an inability to manage the company and have neglected to perform their duties and obligations as set out in the Act or the company’s own Memorandum of Incorporation (MOI). A MOI can be defined as the company’s rulebook and sets out the rights, duties and responsibilities of shareholders, directors and others in relation to a company. Every registered company in South Africa must have a MOI, which can either be a stock standard version of minimum requirements or, without detracting from the required minimum, provide a comprehensive set of rules that are specific to the needs of the company in question. We wholeheartedly recommend the latter.
How long is the delinquency order in place for?
A delinquency order prohibits that person from acting in the capacity of a director for a minimum term of 7 years but can be ordered up to a lifetime, depending on the severity of the transgressions during their directorship.
Who can launch the application?
There are multiple people who may apply to court for a director to be declared delinquent such as a shareholder, director, the company secretary, a prescribed officer and trade union representatives. Some organisations may also make such court application including but not limited to the company itself and the Companies and Intellectual Property Commission (CIPC).
How does the court make its decision?
There are a number director’s duties that are set out in both the Act and the MOI. The court will consider these factors to determine whether the director has breached their obligations against the grounds to determine delinquency when making their finding. The test is both objective and subjective.
To be declared delinquent by the court, a director must be guilty of one of the following acts:
· a gross abuse of their position, gross negligence, wilful misconduct or breach of trust
· intentionally or due to gross negligence by having harmed the company
· taking personal advantage of information or an opportunity that should have benefitted the company
Applying the objective test, the court will look at the set of facts to determine whether the director has violated one of the grounds for delinquency. If so, the court will then apply the subjective test. What this essentially means is whether a reasonable director in the same position, with the same skill set and qualifications, would make the same decision had they been in the same position.
Accountability and Ethical Behaviour
There is a tremendous duty of care that is bestowed on the Directors of companies and we have too often seen that Directors are not held accountable for their actions. The remedy to declare directors delinquent was introduced into South African law in 2011 and is poised to raise the standard of good behaviour and company ethics expected of company directors.
Should you require any assistance with your company MOI, corporate governance policies, director disputes and/or or other corporate or commercial assistance including POPI Act compliance, please do not hesitate to contact us.