Introduction
The Companies Act, 71 of 2008 (the “Act”) places a fiduciary duty on all company directors. Therefore, directors are responsible for acting in good faith, exercising reasonable care, skill and diligence and working in the company’s best interests. A director’s fiduciary duties may be renounced by resignation, or a director may be removed from the Board.
Removal of a Director
Directors may be removed from the Board of a company either by a shareholders’ resolution, removal by the Board of directors or by way of an order of the Court.
Removal by Shareholders
Section 71(1) of the Companies Act states that subject to section 71(2), a company director may be removed by an ordinary resolution adopted at a shareholders’ meeting by the persons entitled to exercise voting rights in an election of that director.
Section 71(2) sets out the procedural requirements relevant to the removal of a director and states that before the shareholders may consider a resolution contemplated in section 71(1):
- The director concerned must be given notice of the shareholders’ meeting and the resolution, at least equivalent to that which a shareholder is entitled to receive, and
- The director must be afforded a reasonable opportunity to make a presentation in person or through a representative to the shareholders’ meeting before the resolution is put to the vote.
In the case of Pretorius and Another v Timcke and Others , the Court noted that a director could not exercise their right to be heard as they would be in the dark on what the issues are by not knowing the reasons for the proposed removal, a director. Further, the Court explained that “rules of natural justice and the fundamental principle of audi alterem partem presupposes the right to place facts and evidence before the decision maker. A prelude to the exercise of the right includes the right to obtain information, particulars or documents to place the affected person in a position to meet the case that needs to be answered.” Therefore, there is an onus on the shareholders to make sure that reasons for the removal are put to the affected director.
However, in a more recent case, Miller v Natmed Defence (Pty) Limited and Others, the Court disagreed with the above finding insofar as the requirement that the director is afforded “reasonable opportunity to make a presentation”, as set out in the Companies Act, must be read to require that reasons for the proposed removal be given to the concerned director before the decision being taken.
The Court went on to state that the requirement that a director must be furnished with reasons for a proposed removal is expressly provided for in the Companies Act. However, this only relates to the removal of a director by the Board of directors.
Lastly, the Court held that the Applicant could not insist on remaining a director in circumstances where the shareholders no longer have trust that he can conduct the affairs of the company to their liking. The appropriate remedy for the Applicant would lie in a claim for damages for loss of office as a director, as contemplated in section 71(9) of the Companies Act.
Sections 71(1) and 71(2) of the Companies Act override anything found to be contrary to the company’s memorandum of incorporation, rules, or any agreement between the company and a director or between the shareholders and a director.
Removal by the Board of Directors
Section 71(3) of the Act prescribes that the removal by the Board of directors may only be done if a shareholder or director alleges one of the following grounds:
- The director has become ineligible or disqualified to act in terms of the Act;
- The director has become incapacitated to the extent that they are unable to perform their functions and unlikely to regain capacity within a reasonable time; and
- The director has neglected or been derelict in their functions.
Removal by Court
Alternatively, a director may be removed by court order if the Court is satisfied that the director is ineligible, disqualified, incapacitated, or has been negligent or derelict.
Resignation
A director may resign at any time. However, they may still be liable if found to have acted negligently during their directorship. The Board must acknowledge the resignation of a director, and the company must lodge the notice of the resignation with the CIPC. Once a director has resigned, they may be authorised to take steps to create a competing company. However, they are not entitled to divert business opportunities to themselves or engage in unlawful competitive behaviours. This would include the apportionment of the company’s business.
Directors Recourse Available
An affected director is entitled to apply to the Court for damages or compensation due should they feel the removal by the shareholders or Board of directors was procedurally unfair, as well as take the decision to Court for review as found in section 71 of the Companies Act.
Conclusion
In conclusion, the onus is always on the director to uphold their fiduciary duties. A director may be removed by shareholders’ resolution or by the Court for failing to exercise these duties. Alternatively, a director may resign but can continue to be held liable for failure to uphold their fiduciary duties during their tenure.
Contact an attorney at SchoemanLaw for your legal needs by visiting our website at www.schoemanlaw.co.za.
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