News & Press: IoDSA in the Press

Delinquency provisions in Companies Act bring errant directors to book

Wednesday, 04 September 2019   (5 Comments)
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The delinquency provisions in the Companies Act are emerging as a key remedy against misconduct by directors in both the public and private sectors.

“What we have seen recently is that these delinquency provisions are increasingly being used to hold directors to account for misconduct,” says Parmi Natesan, CEO of the Institute of Directors in South Africa. “Directors must take note of this, because the penalties are extremely severe.”

In the current battle between Peter Moyo and Old Mutual, the former has instituted action to have the entire board of the company declared delinquent. In the case of the SABC, a news report speculates that the board could be declared delinquent en bloc because they have allowed the corporation to continue trading although it is insolvent.  The Public Investment Corporation (PIC) successfully applied to have two directors it had appointed to the board of VBS Mutual Bank declared delinquent. The court agreed, and the Financial Sector Conduct Authority also disbarred Ernest Nesane, the former executive head of legal at the PIC, and Paul Magula, the former executive head of risk, from practising as investment professionals.[1]  Another instance is the action brought by the Companies and Intellectual Property Commission (CIPC) to have Phumlani Zwane, former director of nuclear services group Nectsa, declared delinquent. This successful application is the first to involve a state-owned entity, and declared Mr Zwane delinquent twice over.[2]

The Companies Act defines various instances of misconduct by a director that could render him or her liable to be declared delinquent by the court. These include consenting to serve as a director while already disqualified or under probation.  Other misconduct that would make a director vulnerable to being declared delinquent includes gross abuse of his or her position, taking personal advantage of information or opportunities that came to his or her attention by virtue of his or her position as a director; or inflicting harm on the company or one of its subsidiaries through gross negligence, wilful misconduct of breach of trust in relation to the director’s fiduciary duties. Provision is also made for barring repeat offenders from holding a directorship again.

The consequences for being declared delinquent could include immediate removal of a director, prohibition from serving as director in future, and severe reputational damage.

A wide range of individuals or juristic persons can bring legal action to declare a director delinquent. They include the company itself, its shareholders, unions, other directors or the company secretary or other prescribed officer.

“A company’s directors bear ultimate responsibility for its success, and they are under an obligation always to act in the company’s best interest. That is a very great responsibility, and comes with great opportunities to make a difference. At the same time, though, failure to discharge that responsibility also comes with heavy sanction,” Ms Natesan concludes.



[1] Warren Thompson, “PIC’s VBS directors declared delinquent”, Business Day (26 August 2019), available at https://www.businesslive.co.za/bd/national/2019-08-26-pics-vbs-directors-declared-delinquent/.

[2] Xolisa Phillip, “High court brings chartered accountant to book”, Daily Maverick (26 August 2019), available at https://www.dailymaverick.co.za/opinionista/2019-08-26-high-court-brings-chartered-accountant-to-book/.

Comments...

Lomalanga V. Matsebula (Dlamini) says...
Posted Wednesday, 09 October 2019
This is an eye opening article. We appreciate it as directors. It will force directors to take a good stock of their responsibilities in the corporate environment. Fiduciary duties that are placed on directors, may be taken for granted, and only appreciated when a company is faced with a crisis. The recent declarations by the courts will definitely send a strong message home. We can only hope that boards will consider ongoing training by IoDSA advisory services. We need deeper training on the duties and responsibilities of board members.
Themba T. Dlamini says...
Posted Friday, 27 September 2019
This is perfect reading. How should one deal with a board member(s) who have not board training and are toxic to the work of a governing body, continues to behave in an unbecoming manner by participating on various social media platforms to discredit the board.
Parmi Natesan (Chetty) says...
Posted Wednesday, 25 September 2019
Adolinda Naicker, kindly email your query to advisory@iodsa.co.za and one of our technical specialists will respond.
Adolinda Naicker says...
Posted Wednesday, 25 September 2019
Thank you ever so much for a brilliant factual article. How does this apply to the NGO sector? I know of a Chairperson who promotes institutional racism and discrimination as well as other director who have placed the organisation under threat who have not complied with the law for the past 10years by not paying COIDA, UIF for staff and discriminating against volunteers and permanent staff. As a stakeholder , how do I handle this matter? Does the "Delinquent Provision" apply to Directors in the NGO sector? This has been a grey area. Please also advise about non-qualified accountants compiling the financial reports which is approved by the Finance Directors? How does one handle this? This happens in the NGO sector?
Sophia M. Nawrattel says...
Posted Monday, 09 September 2019
Refreshing back on track for SA! Corporate and Public governance the execution of mandates are what we need more of. In addition to the Companies Act mandate applied in these two matters, we can look forward to the mandate of Public Audit Amendment Act as inacted 1/4/2019. The new process allows for the Auditor General to address delinquents as well Accounting Officers (indivduals) in line with the PFMA and MFMA acts. - Refer Material Matters - Taking Binding Actions - Issuing a Certificate of Debt to delinquent officers Observing the guidance "Director Due Dilligence" Corporate Goverance Network - September 2013, all parties involved in the new relationships formed should have focused on ethics by applying the "background checks throughout the selection process". CA Sec. 69 (2) seems to have been lost between the parties in the vetting procedures. A consideration is to apply the Directors Declation Schedule 21 (JSE) Questions as a benchmark set of questions - INTEGRITY!