“Knowledge is power.” (Sir Francis Bacon)

Being a company director carries not only rewards but also risks that you need to manage carefully.

In particular, you are held by the Companies Act to a high standard of conduct. Breaching any of your many duties and responsibilities can have significant negative consequences. Among these is being declared a “delinquent director”. That’s no small thing…

It’s a serious long term career risk

Serious categories of misconduct expose directors to being declared delinquent and thus disqualified from holding any directorship or senior management position for a period ranging from 7 years to a lifetime.

A wide range of less serious categories of misconduct can lead to “probation” orders, with possible consequences including disqualification for up to 5 years, supervision by a mentor, remedial education, community service, and payment of compensation.

The other side of the coin, of course, is that the delinquency risk isn’t just a warning to directors. It also gives victims of director misconduct a powerful remedy.

Let’s illustrate in the context of two recent cases.

Seven years in the wilderness (and a R78m damages bill) for a delinquent MD

Two groups of granite producing companies, one responsible for quarrying and the other for production and export, operated inter-dependently for decades. All went well until the Managing Director of the quarrying group of companies placed them into business rescue. Unsurprisingly, this had a devastating effect on both groups, with mining rights in jeopardy, credit lines and bank facilities lost, production levels affected, discussions with SARS over penalties terminated, and millions wasted both in the business rescue process and in remedying the aftermath.

The companies in the surviving group of companies sued the MD of the quarrying group with allegations that those companies should not have been placed into business rescue at all, and for various other acts of mismanagement and misconduct.

The MD’s defences to these claims found no favour with the Court, which declared him delinquent and ordered him to pay R78m in damages. He had, the Court held, unnecessarily placed companies into business rescue without engaging shareholders and despite available shareholder support and the absence of true financial distress. He had acted with gross negligence, caused substantial financial damage, breached his fiduciary duties (i.e. used his powers improperly and not in the best interests of the companies), and neglected his supervisory duties relating to quarry operations.

Another director, another disqualification

Now let’s move to a struggle between two shareholder factions for control of an investment company with energy sector interests. Exasperated, one faction went to the High Court to challenge the validity of a board resolution and share issue which affected their control of the company. There was substantial value at stake here, possibly (reading between the lines of the judgment) many millions of US dollars.

The dispute eventually found its way to the SCA (Supreme Court of Appeal), where, on application by the opposing shareholder faction, a director (and sometime Executive Chairperson) of the investment company was declared delinquent for seven years.

He had, found the Court, acted with gross negligence, wilful misconduct and breach of trust in performing his functions. Here’s one example among many: even after his removal as Chairperson, he purported to call a shareholder meeting “By order of the Chairman.” That alone, said the Court, was “a blithe disrespect for corporate governance and [a breach of] his fiduciary duty as a director.”

If you’re a director, here’s how to manage your risk

Your best defence against hostile stakeholders will always be to remain fully aware of all your many fiduciary duties, and to scrupulously comply with them. Knowledge is power!

Act early to address any financial issues that could lead to accusations of reckless trading or of causing financial harm to the company. Ensure that proper financial and operational controls and procedures are in place. At all times act strictly in the best interests of your company with transparency and good faith, proactively exercise proper oversight of all operations, and – perhaps most importantly – ask us for advice if in any doubt!

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.

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