October 22, 2023 In Consultancy

Delinquent Director- A New Pitfall

With all the recent drama taking place in the S.A. corporate governance environment, the most crushing was the High Court judgement declaring a director of Skyport Corporation, which is in liquidation, a delinquent director for seven years (7) on the grounds of his “gross negligence” and flagrant violation of his duties as a director. The reason for this brutal finding was that Skyport, which was established in 2007, sold shares to the public on the basis that it would establish a new international airport near Malmesbury in the Western Cape. This was despite the fact that the Civil Aviation Authority had rejected its application for a licence. It purchased land for R140m for this purpose and told the CIPC that it would list on the JSE

The judge concluded that Wienand was found to have allowed Skyport to continue operating even though it was in a parlous and insolvent condition. It was found that he extracted cash from the company’s bank account in order to pay director fees, to continue with the business despite knowing that there was no business case for the company, and that he failed to maintain proper accounting systems. The purpose of this article is to highlight what this means for directors of companies.

Section 162 of the Companies Act, 2008 introduced for the first time in SA law the concept of a delinquent director. In the past stakeholders had to invoke common law on the basis reckless trading or gross negligence. These common-law actions did not, however, make provision for declaring someone a delinquent director as is the case under the “new” Act. The action for such a declaration can be brought by a shareholder, a fellow director, the Company secretary or a Trade Union (i.e. employees) of a company. The shareholder in the case of an SOC could mean that any citizen in the country can institute these proceedings against a director. This is already the case for example where a public organization is currently bringing an application against the Chairperson of the SAA board to be declared a delinquent director.

Grounds for bringing the application

One must, on application prove that a director, 1) acted as a director when he was ineligible to act as such due to, for example, already been declared a delinquent director, 2) a director grossly abused her position as director, 3) took personal advantage of her directorship and 4) intentionally or negligently inflicted harm on the company or its subsidiaries. 5)Also, where a director acted in a manner that is grossly negligent, committed wilful misconduct or breach of trust or is incompetent in the performance of her duties. The court must be satisfied that a director committed any one of the foregoing misconduct.

It is important to note that once a court is satisfied of the alleged breaches, then the court MUST make the declaration, the court has no discretion here. The court has a discretion regarding the length of the declaration, a period during which a person is barred from acting as a director of a company for the stated period. A director so declared may after a stated period apply for setting aside or alteration of the judgement. One can also apply for a Probation order rather than a delinquency order. The outcomes are mainly similar save for salient differences in period and subsequent directorships e.g. under a probation one can still be a director either under mentorship supervision or under limited circumstances e.g. where you are a sole director of your own company only.

International comparisons

Australia seems to be a good case-study regarding this concept due to delinquency orders having been part of their jurisprudence for decades. In the Australian case of Roussi & Orrs, a husband and wife team were banned for 10 years on average for trading with their company whilst it was insolvent. The take-home form this judgement is when the court held that this action is “protective rather than punitive” i.e. to protect the public against unscrupulous directors. The court held further that a director of a company “cannot take rewards and disown responsibilities to the company and society”. For that reason, the court concluded that a “clearest and most serious” response is required from the courts to protect communities.

Directors are under immense pressure to ensure profits for the shareholders, comply with governance and legal requirements and in the same stroke manage companies to protect stakeholders and communities from unscrupulous directors. We are clearly on a path towards “hanging the director”

A tip I will provide for free is to ensure that all newly appointed directors sign a declaration that they have not been declared a delinquent director. This will protect the companies’ image in case skeletons come out down the road.

Ronny Mkhwanazi is the Managing Director at Mkhwanazi Inc. Board member, Corporate Law, Trade Law and Governance expert.