Delinquent Directors and Directors on Probation

Introduction

An application may be made to the court to declare a director delinquent or to be placed under an order or probation. A wide range of persons may apply to a court for the above order; these range from a company, a shareholder, a director, a company secretary or prescribed officer of a company, a registered trade union that represents employees of a company or another employee representative, the Companies Commission and the Takeover Regulation Panel. Specific grounds of delinquency or probation are available to each of these persons. The application may be brought not only against a present director of a company but also against a former director.

Grounds of Delinquency

A court ‘must’ make an order declaring a person a delinquent director if inter alia, the person –

1. consented to serve as a director, or acted in the capacity of a director or prescribed officer, while ineligible or disqualified to be a director;
2. while under an order of probation, acted as a director in a manner that contravened that order;
3. while a director, grossly abused this position;
4. while a director, contrary to section 76(2)(a) of the Act, took personal advantage of information or an opportunity, or intentionally or by gross negligence inflicted harm on the company or a subsidiary of the company;
5. while a director, acted in a manner that amounted to gross negligence, wilful misconduct or breach of trust or in a manner contemplated in section 77(3)(a), (b) or (c) of the Act (unauthorised acts, reckless trading or fraud);
6. has repeatedly been subject to a compliance notice or similar enforcement mechanism;
7. has at least twice been personally convicted of an offence or subjected to an administrative fine or penalty in terms of any legislation; or
8. within a period of five years, was a director of one or more companies or was a managing member of one or more close corporations, or controlled or participated in the control of a juristic person (irrespective of whether concurrently, sequentially or at unrelated times) that was convicted of an offence or subjected to an administrative fine or similar penalty in terms of any legislation.

Grounds of Probation

In terms of section 162(7) of the Act, a court ‘may’ declare a person under probation if the person –

1. while a director, was present at a meeting and failed to vote against a resolution despite the inability of the company to satisfy the solvency and liquidity test, contrary to the Act;
2. while a director, acted in a manner materially inconsistent with the duties of a director;
3. while a director, acted in or supported a decision of the company to act in a manner that was oppressive or unfairly prejudicial in terms of section 163(1) of the Act; or
4. within ten years after the effective date (1 May 2011) was a director of more than one company or a managing member of more than one close corporation (concurrently, sequentially or at unrelated times), and during that time two or more of those companies or close corporations failed to fully pay all of their creditors or meet all their obligations (except under a business rescue plan resulting from a board resolution in terms of section 129 of the Act or a compromise with creditors in terms of section 155 of the Act).

Terms of the Order and Conditions 

The effect of an order of delinquency is that a person is disqualified from being a director of a company. An order of delinquency may, under certain circumstances, be unconditional and subsist for the lifetime of a delinquent director, or it may be conditional and subsist for seven years or longer, as determined by the court. 

A person who has been placed under probation may not serve as a director except to the extent permitted by the order of probation. The probation order may be subject to any conditions the court considers appropriate and generally for a period not exceeding five years.

Some of the conditions that a court may impose on the order are that a director is required to undertake a designated program of remedial education relevant to the nature of his or her conduct as a director or to carry out a designated programme of community service. A person may also be ordered to pay compensation to any person adversely affected by their conduct as a director, to the extent that such a victim does not otherwise have a legal basis for claiming compensation.  

Conclusion

In conclusion, it is imperative for directors, companies, and stakeholders to  fulfill their responsibilities and steer clear of negligence diligently. For businesses grappling with challenges, exploring potential remedies emerges as a pivotal solution to address overarching issues. Should you require assistance with your corporate legal matters, do not hesitate to reach out to SchoemanLaw, where your needs can be expertly addressed.