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ERRANT DIRECTORS BEWARE!

INTRODUCTION

The roles and responsibilities of directors have recently come under the spotlight due to many reported instances of untoward conduct in the affairs of their companies. Consequently, directors perceived as guilty of undermining their fiduciary duties face the increased risk of criticism, sanctions and other severe consequences.

Accordingly, the Companies Act 71 of 2008 (“the Act”) has increased the responsibilities and obligations of directors holding office, as well as their liabilities for negligent and/or untoward conduct of directors. The Act is therefore fundamental to understanding the consequences that delinquent directors are faced with.

DELIQUENT DIRECTORS

Pursuant to the Act, in order to have a director declared a delinquent or have a director placed under probation, an application must be made to the court for an order to such effect.. Section 162 of the Act grants a wide range of persons the power to bring such applications, including  inter alia  a legal entity, a shareholder of the company, a fellow director, a company secretary or prescribed officer of the company. In certain instances, an organ of state responsible for the administration of any legislation may bring an application to a director delinquent in certain instances.

Subject to time limitations, a director who has resigned from office or who has been removed as a director of a company, will not escape a court order being issued against him/her in terms of section 162.

GROUNDS OF DELINQUENCY

In terms of s 162(5) of the Act, a court ‘must’ make an order declaring a person a delinquent director if he – 

  • had acted as a director or prescribed officer, while ineligible or disqualified in terms of section 69 of the Act;
  • whilst under a probation order in terms of the Act or the Close Corporations Act 69 of 1984, acted in a manner that contravened that order;
  • grossly abused the position of a director;
  • took personal advantage of information or an opportunity to gain an advantage for him or herself or for another person other than the company or a wholly owned subsidiary of the company;
  • intentionally or by gross negligence, inflicted harm upon the company or a subsidiary of the company;
  • acted in any manner that amounts to gross negligence, willful misconduct or breach of trust in relation to the performance of the duties of a director; or
  • allowed the business of the company to be conducted recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose.
  • In the event that any of the above grounds are established by a party bringing an application for a declaration of delinquency, the court is obligated to grant such an order and may not exercise any discretion in doing so.

THE EFFECTS OF DELIQUENCY

A declaration of delinquency is effective for a minimum period of seven years, or such longer period as determined by the court, and the person is disqualified from being a director of a company. 

Additionally, a court has the power to impose certain conditions including that the director undertakes remedial education relevant to the nature of his conduct as a director, to carry out community service or pay compensation.

It is evident from the above that directors of companies must carefully consider the manner in which they conduct the company’s affairs, especially with the prevailing focus on corporate governance and a higher calling for accountability.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)