Delinquent Directors

Declaring a director delinquent in terms of the Companies Act.

If a director conducts himself or has previously conducted himself, whilst being a director of a company, in a manner which is inappropriate, an application aimed at declaring such director a delinquent, may be brought.

This article aims to explain who may bring such application, on which grounds and the consequences of an order declaring a director delinquent.

An order wherein it is sought that a director be declared delinquent can only be launched by certain entities or persons. The Companies Act 71 of 2008, defines the persons or entities that have locus standi to launch such application in Court, these persons or entities being as follows:

The company at which the Director acts as such;
A shareholder of the company;
A follow Director;
The company secretary or prescribed officer of a company;
A registered Trade Union that represents employees of a company or another representative of the employees;
The Companies Commission;
Takeover Regulation Company.

The person or entity launching such application must therefore have some sort of interest in the company.

This application is not limited to being launched against a current director, but also against a former director, provided that such director had been a director within the 24 months immediately preceding the application.

In order to be successful with such an application, there must be a ground of delinquency founding the application. The Act provides for the following grounds of delinquency:

Consented to serve as a Director, or acted in the capacity of prescribed officer, while ineligible or disqualified to be a director;
While under an order of probation, acted as Director in a manner that contravened that order;
While a Director, grossly abused the position of a Director;
While a Director, took personal advantage of information or an opportunity, or intentionally or by gross negligence inflicted harm upon the company or a subsidiary of the company;
While a Director, acted in manner that amounted to gross negligence, wilful misconduct or breach of trust in relation to the performance of his or her functions and functions to the company;
Has repeatedly been subject to a compliance notice or similar enforcement mechanism;
Has at least twice been personally convicted of an offence or subjected to an administrative fine or penalty, in terms of any legislation; or
Was, within a period of five years, a director of one or more companies, or a managing manager of one or more close corporation, or controlled or participated in the control of a juristic person, that was convicted of an offence or subjected to an administrative fine or similar penalty in terms of any legislation.

The consequences of an order of delinquency, should the application be successful, are as follows:

The person will be disqualified from being a Director of a company;
Such an order can be conditional or unconditional, the latter means that the order can be for a lifetime, whilst the former will be for seven years or longer, as determined by the Court.

In addition to declaring a Director delinquent, the court may further impose certain conditions, such as the following:

That such delinquent director undertakes a programme of remedial education relevant to the nature of his or her conduct as Director;
Or to carry out a programme of community service;
That the delinquent director pay compensation to any person adversely affected by his or her conduct as a director, to the extent that such a victim does not otherwise have a legal basis for claiming compensation.

An order of delinquency may be set aside or suspended, in the following circumstances:

A period of three years has passed since the order of delinquency was made; the delinquent director may apply to court to suspend the order;
Provided the order has been suspended, it may be set aside by the court after two years of suspension, upon application by the director.

Should you require legal advice to ascertain whether a director is acting in a manner which renders him delinquent, alternatively require advice in being faced with such application being brought against yourself, you may contact our offices for assistance in this regard.

Commercial Law