Understanding the concept of a delinquent director

24 Jul 2020

The former South African Airways chairperson, Duduzile Myeni (Myeni), was declared a delinquent director by the provincial division of the Gauteng High Court. Namely, because she failed to perform her duties as a director of a company as prescribed by the common law and the Companies Act, 71 of 2008 (the Act). This shows that a director who acts grossly negligent or recklessly may be declared delinquent.

The following is a brief discussion that sheds light on the concept of a delinquent director.

A DIRECTOR

The Act describes who will be regarded as or held to the same standard of a director.

In the Act, a director is described as:

“a member of the board of a company … or an alternate director of a company and includes any person occupying the position of a director or alternate director, by whatever name designated.”

An alternate director is described as:

“a person elected or appointed to serve, as the occasion requires, as a member of the board of a company in substitution for a particular elected or appointed director of that company.”

The Act also includes the concept of a “prescribed officer”, who is a person that, despite not being a director,

“exercises general executive control over and management of the whole, or a significant portion, of the business and activities of the company, or regularly participates to a material degree in the exercise of general executive control and management of the whole, or a significant portion of, the business and activities of the company.”

Prescribed officers and members of board sub-committees should therefore function at the standard expected of a director.

DUTIES OF A DIRECTOR

Directors are expected to act in accordance with the common law and the Act when executing their fiduciary duties. Directors have fiduciary duties due to the amount of trust placed in them. This is because they are representatives of both the company and those with a vested interest in the company. (Such as, amongst others, investors, employees, and other directors in the company.)

The Act codifies the duties and expected standards of a director as found in common law. These are provided at section 76 of the Act and include, amongst others, to (I) act in good faith with honesty and loyalty, (II) exercise reasonable skill and care, and (III) avoid conflicts of interest.

In addition, the following is expected of a director.

  1. When making a decision, the director should act in good faith and take reasonably diligent steps to become informed about a matter. (This is known as the business judgement principle.) A director is permitted to rely on the advice of others. However, the director must reasonably believe that these persons are both competent and reliable.
  2. She or he must disclose any personal financial interest in a matter. A director may not use their position, or any information obtained while acting as a director, to gain a personal advantage, or to knowingly cause harm to the company. She or he must also disclose any information that comes to her or his attention unless it is reasonable and legally sound not to.
  3. The director must also have a rational basis for believing that a decision was in the best interests of the company.

In terms of the High Court judgment, Myeni had unjustifiably caused the demise of a lucrative deal between SAA and Emirates. It is further known that Myeni was the cause of the collapse of an Airbus-swap deal due to unreasonably delaying its conclusion. These deals could have saved SAA or at least strengthened its financial position.

Conduct of this nature falls below the expected standard of a director. These decisions were neither in the best interest of the company nor indicative of reasonable skill and care.

It is worth noting that, the Public Finance Management Act 1 of 1999 as amended (at sections 50 and 51), and the King Codes on Corporate Governance (which provide corporate governance guidelines) further highlight the duties and role of a director. Directors should also be mindful of these legal frameworks to have a more informative understanding of what is expected of them.

LIABILITY OF A DIRECTOR

Section 77 of the Act provides that a director may be held liable for any loss, damages or costs caused to the company because of any breach of his or her duties.
The company may claim relief from a director through the law of delict and/or criminal law for misconduct. These claims must be instituted within 3 years of the misconduct to avoid prescription.

However, not all is lost for directors who fail to meet the prescribed standard. A Court may relieve a director of liability in certain instances. For instance, a director will not be liable for unwilful misconduct if: (I) he or she acted honestly and reliably, and (II) given the circumstances it would be fair to excuse the director.

Section 78 of the Act also allows a director to be indemnified.

  • Section 78(4) of the Act permits a company to advance expenses to a director to defend against litigation that arises from services rendered to the company.
  • Section 78(5) of the Act allows for the company to indemnify a director for liability arising from certain misconduct.
  • Section 78(7)(a) of the Act permits the company to purchase insurance to protect a director against liability and expenses for which the company is permitted to indemnify a director.

Despite the Act providing means for relieving a director of liability, as mentioned, these means are not always available. For instance, it would be difficult, if not impossible, for a company to excuse a director whose conduct is so reckless and grossly negligent that it warrants a declaration of delinquency in terms of section 162(5) of the Act.

A DELIQUENT DIRECTOR

Section 162(5) of the Act prescribes when a board member should be declared a delinquent director. This includes but is not limited to when: (c)(I) a director grossly abuses the position of a director, (c)(II) takes personal advantage of information or an opportunity owing to the company, (c)(III) intentionally or by gross negligence inflicts harm on the company or a subsidiary, and (c)(IV) breaches trust in relation to the performance of the director’s functions. Myeni causing the collapse of the deals as mentioned above is an example of conduct that is grossly negligent.

If a person is declared a delinquent director under section 162(5)(b) of the Act, he or she may not be a director for a minimum period of seven years. The Court may, however, relax this order after three years and place the director under probation in terms of section 162(11)(a).

This legal tool protects the company and its stakeholders. It further protects the existing bond of trust between the two.[1]

This protection is necessary considering the responsibility of management placed on the board of directors in terms of section 66(1) of the Act. Section 66(1) of the Act provides that the affairs of a company must be managed by the directors of the board. Accordingly, directors are authorised to exercise all the powers and perform all functions of the company (unless limited by the company’s constitution).

It is therefore important for the law to prohibit certain persons from being appointed as a director of a company. Especially, if he or she has a history of performing the duties of a director in a reckless or grossly negligent manner.

CLOSING THOUGHTS

A director of a company is expected to perform duties prescribed by the common law and the Act. The Act provides means for holding a director liable for failing to fulfill these duties. Section 162 of the Act allows for the Court to declare a board member as a delinquent director. Namely, when the director acts grossly negligent and/or recklessly. This affords companies and stakeholders protection against a director who has a history of performing his or her duties in a reckless or grossly negligent manner.

[1] Gihwala v Gracy Property Ltd 2017 (2) SA 337 (SCA) see at para 144

See also:

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)
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