How to remove directors during a deadlock
27 Mar 2017
The board of directors of a company are responsible for managing the business and affairs of the company. However, disputes between directors and/or shareholders can lead to a deadlock on board and/or shareholder level. This can frustrate the board’s ability to effectively manage the business and affairs of the company. This article will briefly set out the requirements and process to remove a director in circumstances where the shareholders are directors and there is a deadlock at both levels.
Section 71 of the Companies Act No. 71 of 2008 sets out various ways to remove a person as a director of the company. In terms of section 71, a director may be removed:
- by an ordinary resolution of the shareholders;
- by the board of the company if the board comprises of at least 3 directors; and
- by the Companies Tribunal, if the board comprises of fewer than 3 directors.
In the event that each shareholder holds 50%, they will not be able to remove a director by ordinary resolution, as you require more than 50% to pass an ordinary resolution. In other words the shareholders will be deadlocked on the decision.
Section 71(8) of the Companies Act states that, if the board comprises of less than 3 directors, a director or shareholder may apply to the Companies Tribunal to remove a director. The Companies Tribunal may make an order to remove a director in any of the following circumstances as set out in section 71(3), if the director has:
- become ineligible or disqualified, other than a person who is ineligible or disqualified from being a director in terms of a court order prohibiting a person to be a director or declaring that person as a delinquent director;
- become incapacitated to the extent that the director is unable to perform the functions of a director and is unlikely to regain that capacity within a reasonable time; or
- neglected or been derelict in the performance of the functions of a director.
Section 69(7) and (8) stipulates when a person will be ineligible or disqualified from acting as a director of a company. Whether or not a person is incapacitated to the extent that he cannot act as a director is a question of fact and depends on the circumstances (an example would be if the director has suffered a stroke with no reasonable probability of recovering). In order to prove that a director has neglected or has been derelict in the performance of the functions of a director, it is necessary to consider the following:
- the functions of a director and whether the particular director has been neglecting it;
- the standards of a director as set out in section 76 of the Companies Act and whether or not the particular director has complied therewith; and
- the common law duties of a director.
In the event that a particular director has become ineligible, disqualified, incapacitated or has neglected or has been derelict in his duties, a director or a shareholder may apply to the Companies Tribunal. Section 71(8) thus provides a mechanism for companies which are deadlocked to remove a director.
In order to lodge an application with the Companies Tribunal for the removal of a director, a shareholder or a director (“Applicant”) must:
- lodge an application with the Companies Tribunal on the correct form and supported by an affidavit stating the relevant provision of the Companies Act in terms of which the application is brought. An application can be sent per hand, email, registered mail or fax;
- send a copy of the abovementioned application together with the affidavit to the director who is sought to be removed (“Respondent”), within 5 business days after filing at the Companies Tribunal;
- the Respondent shall then have an opportunity to oppose the application by sending a copy of the reply, in the form of an affidavit, to the Applicant within 20 business days after being served. Thereafter the Respondent must send the original reply together with proof that it has been sent to the Applicant to the Companies Tribunal;
- the Applicant shall then have the opportunity, within 15 business days of receiving the Respondent’s reply, to send a further replying affidavit to the Respondent and then to send the original with proof that it was sent to the Respondent to the Companies Tribunal.
Once the above steps have been completed, the Companies Tribunal shall set a date to hear the matter. Once the Companies Tribunal has heard the matter, it must decide whether or not to grant the application for the removal of the director. The Companies Tribunal’s decision may be reviewed by the High Court of South Africa.
The ability of a director or a shareholder to apply to the Companies Tribunal is a more cost efficient alternative remedy than applying to court for the removal of the director. This is the perfect avenue for small business that cannot afford attorney costs on the high court scale. Applicants should be wary of not burdening the Companies Tribunal with frivolous and trivial matters as this may result in the matter being thrown out.