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Company directors face the wrath of stakeholders and regulators

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Corporate/Commercial Bulletin

It has recently been reported in the press that a court action is underway against the chief executive of the Nuclear Energy Corporation of SA with a view to having the chief executive declared a delinquent director in terms of the Companies Act. This declaration would preclude him from acting as a company director for a period of at least seven years.

Other actions taken by the Companies and Intellectual Property Commission (CIPC) against directors of State Owned Enterprises have also been reported in the press. For instance, during 2014, the CIPC corresponded with the boards of various State Owned Entities regarding their compliance with corporate standards and raised the possibility of suspension/delinquency.

However, stakeholders (such as shareholders, fellow directors and employees) in private and listed companies can take similar steps against directors, and our courts have recently had the opportunity to pronounce on this issue in the case of Motale v Abahlobo Transport Services (Pty) Ltd.  

It should be noted at the outset that the Companies Act provides for a court application to be made for a director to either be placed under probation or to be declared a delinquent director. Different actions or defaults by the director concerned will determine whether the application is made for delinquency or probation, and an explanation of the specific instances in which an application can be made and how this order can be rescinded are beyond the scope of this article. However, in summary, the two different actions can be summarised as follows.

  • The delinquency remedy is applicable in more serious instances of complaints, for instance where the director grossly abused the position of director or intentionally inflicted harm upon the company or a subsidiary thereof. The sanction is also more serious in that the person that has been declared delinquent is disqualified to be a director of a company for a period of at least seven years.
  • The probation remedy is applicable in less serious instances of complaints, for instance where the person acted in a manner materially inconsistent with the duties of a director. The sanction is also less serious in that the restriction applies for a period not exceeding five years and the director is not totally barred from acting as a director – he/she can serve as a director to the extent permitted by the court order of probation.

In the Motale case, Motale, both a director and a shareholder of the first respondent company, brought an application to have the company chairman and the company secretary placed under probation. Motale claimed that the conduct and omissions of the company chairman and company secretary, coupled with the refusal to allow Motale access to certain company records, amounted to conduct which was “materially inconsistent” with the duties of a director, in terms of section 162(7)(a)(ii) of the Companies Act. These omissions included the failure to register the applicant as a director and a shareholder of the company, failure to give notice of meetings to the applicant and that financial irregularities in the company occurred under the company chairman and company secretary’s control.

The court found that the above irregularities violated the most basic duties of directors and the court placed the company chairman under probation for a period of one year and subject to the condition that he be supervised by a mentor.

It has been shown in Motale that courts will use their broad statutory powers to place directors under probation / delinquency should the actions of the director justify this intervention. The severity of the consequences of being placed under probation / delinquency serve as a caution to directors to always act properly and in accordance with the duties imposed on them throughout their term of office as such and in addition presents a useful tool to stakeholders in companies to hold directors accountable.  

Finally, the remedies will likely prove useful to the CIPC and other regulators in promoting good governance in State Owned Enterprises and to eradicate problems which have persisted for many years in these entities.


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