When consulting a dictionary the word “delinquent” echoes into “committing crimes”, “lawless”, “lawbreaking”, “criminal”, “offending” and “failing one’s duty” – these are certainly not words we would want to use in the same sentence as “director”. Therefore, it is vital for South African directors to take cognisance of the impact of section 162 of the Companies Act, in order to not open themselves to the possibility of being declared a delinquent.
Who is a delinquent director? / What are the grounds for delinquency?
The act provides for grounds on which applications may be brought to have someone declared a delinquent. If just one of the following criteria is met, the court has no discretion – a court must declare someone a delinquent director:
1. If the person consented to serve as a director while being ineligible or disqualified of being such. Examples are: where the director is an unrehabilitated insolvent; has been removed from office on the grounds of dishonesty; or where the director has been convicted of crime, theft, fraud, forgery or any other conduct involving fraud, misrepresentation or dishonesty;
2. While under an order of probation, acted as a director in a manner that contravened that order;
3. While being a director:
3.1 Grossly abused the position of director; or
3.2 Took personal advantages of information or an opportunity; or
3.3 Intentionally, or by gross negligence, inflicted harm upon the company or a subsidiary company; or
3.4 Acted in a manner that amounted to gross negligence, wilful misconduct or breach of trust in relation to the performance of its functions within his/her duties to the company.
Up to this point one may think that these are quite obvious, and directors that subject themselves to this kind of conduct, should not be directors. But the section continues to some instances that may not be as obvious.
A court must further also declare a director a delinquent if he/she has repeatedly been personally subject to a compliance notice or similar enforcement mechanism for substantially similar conduct, in terms of any legislation. Or in the case where the court is satisfies that the declaration of delinquency is justified, having regard to the nature of the contravention.
Effect/Consequences of being a delinquent?
Declaration of delinquency may either be unconditional and will then subsist for the lifetime of the person OR a court may make it subject to any conditions the court considers appropriate, including a condition to limit the application to only certain categories of companies. This will depend on the grounds of delinquency.
Who may apply to court?
A company, a shareholder, director, company secretary or prescribed officer of a company, a registered trade union or any other representative of the employees of the company may apply to a court for an order to declare a director delinquent. In some instances organs of state may also bring an application.
Oddly, creditors do not have the power to apply to a court to have a director declared a delinquent.
It must also be kept in mind that a delinquent director is not prohibited from being a shareholder, therefore, unfortunately, delinquents may still have influence in a company.