- The Companies Act 71 of 2008 allows certain categories of corporate actors to apply to the courts to declare a director to be delinquent in certain circumstances.
- These categories of corporate actors can use the order of delinquency to hold directors to account for having grossly abused their fiduciary responsibilities.
- The consequences of delinquency are damning, not only in the ban on being a director for up to seven years but also in the reputational damage to the director.
- Directors must be wary of any conduct that can expose them to an application for a delinquency order.
An application can be brought against a person who is a director of a company or was a director of a company within the 24 months immediately preceding the application, and while a director, he/she –
Grossly abused the position of director.
Took personal advantage of information or an opportunity, obtained while acting in the capacity of a director to –
- – Gain an advantage for the director, or for another person other than the company or a wholly owned subsidiary of the company; or
- – Intentionally, or by gross negligence, inflict harm upon the company or a subsidiary of the company.
Acted in a way that amounts to gross negligence, willful misconduct, or breach of trust.
An application can also be brought against a person who, while being a director of a company, acted in a way that he/she could be held liable for any loss, damages, or costs sustained by the company for example by –
- acting in the name of the company or authorise the taking of any action by or on behalf of the company, despite knowing that he/she lacks the authority;
- acquiescing in the carrying on of the company’s business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose or that the company is trading under insolvent circumstances; or
- being a party to an act or omission by the company to defraud a creditor, employee or shareholder of the company, or with a fraudulent purpose.
The drafters of the Act sought to limit the scope of the application of this remedy by stipulating a closed list of corporate actors that can bring such an application.
The company or its –
- Shareholders
- Directors
- Company Secretary
- Prescribed Officers
A registered trade union that represents employees of the company
A representative of the employees of a company
- Two court decisions have expanded the category of corporate actors that can bring an application for delinquency by reading s162 of the Act together with s157(1)(d) of the Act, to allow for a third party to bring an application for a delinquency order.
- In Organisation Undoing Tax Abuse NPC and Another v Myeni and Another the Court allowed a non-profit organisation, that is acting in the public interest, to apply for a delinquency order.
- In Vantage Mezzanine Fund II v Hopeson and Others, the High Court held that one of the objects of the Act is to provide investors and third parties with greater remedies and, therefore, a reading of the Act which seeks to categorically deny a creditor the right to apply for a delinquency order is contrary to the spirit of the Act.
It is important for directors and prescribed officers to be aware of the proscribed conduct that may expose them to an order of delinquency to avoid the consequences of an application for a delinquency order being south against them.
Companies should provide regular training to their directors and prescribed officers on the high governance standards that are expected of them, including statutory obligations, fiduciary duties, financial literacy, and conflict of interest.
