ERIC LEVENSTEIN: Zondo findings highlight need to hold errant directors responsible

The Zondo state capture commission’s findings (published in early January and early February), have again opened up the debate about the necessity to hold errant directors responsible for having grossly abused their positions in terms of the Companies Act.

The Zondo reports listed a number of directors (about 20) who require further investigation and possible prosecution by the relevant authorities, in particular the National Prosecuting Authority (NPA). Convictions might result in further rulings by a court that such directors are to be declared delinquent.

Section 162 of the act legislates that a court must declare a director to be delinquent where they have failed to discharge their duties under the act, and must further grant appropriate relief to the companies involved, which may claim damages from a director for losses incurred as a result of their conduct.

Behaviour that would support a finding of delinquency would include a director or prescribed officer who has intentionally, or by gross negligence, inflicted harm upon the company or a subsidiary, contrary to the provisions of the act, or acted in a manner that amounts to gross negligence, wilful misconduct or breach of trust in relation to the performance of the director's duties. Reckless behaviour and any action taken by a director that has the intent to defraud any person or for any fraudulent purpose is also prohibited.

Action in terms of Section 162 can be taken by various parties, including an aggrieved shareholder, a director, company secretary or prescribed officer of the company, a registered trade union that represents the employees of the company, or any representative of the employees of the company. 

It is important to note, particularly in the case of findings made against directors by the Zondo commission, that aggrieved parties can only apply to court to have a director declared delinquent if such a person was a director within a period of two years before the application for delinquency being launched. 

The clock is ticking to act against those directors that remain directors and who did not resign from relevant company boards within a period of two years. The Zondo commission is certainly concerned that directors who resign from boards may be able to escape liability for their misconduct if the application to declare them delinquent is not launched soon. The commission has proposed an amendment to section 162 of the act to extend the cut-off period to launch proceedings against these directors beyond the two year period.

The implications of an order for delinquency are serious. Any declaration of delinquency will subsist for the lifetime of the director declared to be delinquent. Such a declaration may be made subject to any conditions the court considers appropriate, including a limitation of the application of such a declaration to one or more particular categories of companies. 

Any person who has been declared delinquent may, however, apply to court to suspend the order of delinquency and substitute it with an order of probation, with or without conditions, at any time more than three years after the order of delinquency was made, or to set aside an order of delinquency at any time more than two years after it was suspended, or an order of probation at any time after such order was made.

This will not be available to a person declared delinquent on account of having consented to serve as a director while ineligible or disqualified under the act, or while under probation in terms of the act or the Close Corporations Act and acted in a manner that contravened that order.

As an alternative to a declaration of delinquency a court may make an order placing a director under probation instead. This would occur under circumstances where the court is satisfied that the declaration is justified, having regard to the circumstances of the company’s conduct and the person’s conduct in relation to the management, business or property of the company at the time.

Such order for probation (similar to a suspended sentence) will be made subject to conditions that the court considers appropriate and may subsist for a period not exceeding five years.

Furthermore, any person may be placed under probation if he or she:

• Acts in a manner materially inconsistent with the duties of a director; or

• Acts in or supports a decision of a company to act in a manner that results in oppressive or prejudicial conduct; or

• On some basis acted in a manner that constituted an abuse of the separate juristic personality of such company.

If a person is placed under probation he or she is to be supervised by a mentor in any future participation as a director while the order remains in force, or be limited to serving as a director of a private company or of a company of which that person is the sole shareholder.

In the recent (and relevant) case of Organisation Undoing Tax Abuse and another vs DC Myeni & others [2020] 3 All SA 578 (GP), former SAA chair Dudu Myeni was declared a delinquent director in terms of the act. The court found that Myeni had comprehensively failed to fulfil her duties as a director, ordered that she be declared a delinquent director for life, and further ordered that she pay punitive costs. The judge also referred the judgment and evidence to the NPA for investigation regarding possible criminal conduct. 

The court’s far-reaching judgment is timely for a number of reasons — it finally tests in court the Institute of Directors of Southern Africa’s long-standing contention that directors must inform themselves properly about the nature and extent of their duties towards the organisation, or place themselves in peril.

It is also clear from the evidence that was led that the courts will rely not only on legislation but also the King reports on corporate governance. Together, these provide a sound framework to guide directors in fulfilling their duties satisfactorily.

Directors have a critical role to play, and they can only do it if they are fully conversant with what their legal and fiduciary obligations entail.

• Levenstein is head of business rescue and insolvency practice at Werksmans Attorneys.