There are circumstances in which a director’s services may need to be terminated.
Under the Companies Act 71 of 2008 (“the Act”), a director of a South African company can be removed in four primary ways:
- By the shareholders at a general meeting (section 71)
- By a court order (section 162)
- Automatically due to disqualification (section 69)
- By the board of directors, but only if the company’s Memorandum of Incorporation (MOI) expressly allows for this
It is essential to review the company’s Memorandum of Incorporation (“MOI”) for any specific requirements or higher voting thresholds. Additionally, strict adherence to the notice and timing provisions outlined in sections 62 and 71 must be ensured. It is also crucial to consider the director’s potential claim for damages if their removal violates an employment contract or service agreement.
This was illustrated in the Supreme Court of Appeal (“SCA”) case of Mawerco (Pty) Ltd v Sithole and Others (322/2023) [2024] ZASCA 91.
In this case, Mawerco (Pty) Ltd is a joint venture company, with the Mawewe Communal Property Association as the majority shareholder holding 51%, while Crookes Brothers Ltd holds 49%. According to the shareholders’ agreement, each party has the right to appoint and remove three directors. Two of the directors appointed by the Association, Mr. Sithole and Mr. Nitwane, were removed under this agreement. They challenged their removal in the High Court. Instead of initiating a formal review, they sought declaratory relief, arguing that their removal was procedurally flawed and, therefore, unlawful.
What Happened in the High Court?
The court:
- Declared the removal of the directors invalid;
- Ordered their reinstatement to the board; and
- Directed payment of backdated director’s fees and benefits.
Nonetheless, no formal review of the removal decision was held under the Promotion of Administrative Justice Act 3 of 2000 (“PAJA”) or common law. This omission was significant.
What the Supreme Court of Appeal (SCA) Ruled
The High Court considered the matter based on the premise that Section 71 of the Companies Act 71 of 2008 governs the removal of directors. Since that process was not followed, the respondents argued they were entitled to declaratory relief.
However, this understanding misinterpreted the situation. The respondents served as directors of the company as representatives of the Association, and the resolution passed by the Association had not been challenged. The adoption of that resolution meant that the respondents could no longer serve as directors of the company. Therefore, the relief granted by the High Court is not valid and must be set aside on appeal.
Therefore, the SCA found that the High Court’s approach was incorrect for several reasons:
1. Decisions Must Be Reviewed—Not Just Declared Invalid
The court confirmed the principle from Oudekraal that once a decision has been made (even if flawed), it exists in law until it is formally reviewed and set aside. Declaratory relief alone cannot achieve this.
The court stated: “The decision to remove the directors was never set aside… Therefore, it remains valid and binding.”
- Wrong Procedural Route
The SCA emphasised that the respondents should have used Rule 53 of the Uniform Rules of Court to bring a formal review of the decision.
- Declaratory Relief is not a Remedy
The court explained that declaratory relief cannot substitute the proper remedy, especially when public or quasi-public power is exercised.
- Directors’ Removal Was Not Automatically Invalid
Because no review was launched, the removal—whether right or wrong—remained legally effective. Thus, reinstating the directors without setting aside the removal decision was not competent.
Conclusion
When challenging a decision, particularly in corporate or administrative contexts, it’s important to pursue a review rather than simply seek a declaration. Clearly identify the decision in question, request a record of it, and allow the court to examine the reasoning behind that decision.
Directors should understand that if they are removed improperly, the legal remedy will depend on the process followed, not just on the merits of the decision itself.
It’s also important to note that while this process can confirm rights, it does not invalidate actions that have already been taken, especially corporate resolutions.
For assistance, please contact an expert at SchoemanLaw Inc.
Recent Comments