3 May 2017 by Dispute Resolution Alert

Commercial law: Declarations of delinquent directors and the push for corporate accountability

On receipt of an appropriate application, a court is obligated to opine, and if satisfied, declare a director of a company whose actions amount to gross negligence, wilful misconduct or breach of trust in relation to the performance of that director’s functions and duties to the company, to be a “delinquent director” in terms of s162(5)(c)(iv)(aa) of the Companies Act, No 71 of 2008 (Act). The concept of a “delinquent director” is one introduced by the 2008 Act, however, the criteria listed above are not new to South African corporate law.

The case The Companies and Intellectual Property Commission v Cresswell & Others [21092/2015] (judgment 27 March 2017) is particularly noteworthy as being the first application of its kind to be initiated by the Companies and Intellectual Property Commission (CIPC) as opposed to by a disgruntled creditor of the company. The Act makes provision in chapter 7, part D and E for the Commissioner of CIPC or the Minister of Trade and Industry to appoint investigators to investigate any alleged contravention of the Act. CIPC, acting on the investigator’s report, is empowered by the Act to take the necessary legal action against the transgressors thereof.

The criteria of “gross negligence” and “wilful misconduct” were explored in context by Judge Dennis Davis of the Western Cape High Court in the Cresswell judgment. Davis, J emphasised the importance of proper corporate governance stating that:

Directors have clear responsibilities to the public in the form of investors, creditors, shareholders, employees to perform in a fashion wherein not only does the company behave in an accountable manner to these stakeholders but that it adheres to a level of transparency which ensures that the principle of accountability is vindicated.

In 1988, in S v Dhlamini 1988 (2) SA 302 (A), the old Appellate Division declared gross negligence to be characterised by an entire failure to consider the consequences of one’s actions, an attitude of “reckless disregard” for those consequences. In Philotex (Pty) Ltd and others; Braitex (Pty) Ltd and others v Snyman and others 1998 (2) SA 138 (SCA), the Supreme Court of Appeal amplified this definition by stating that “reckless disregard” cannot pertain to foreseen consequences of one’s actions but must refer to unforeseen consequences. This is due to the legal definitions of “intentional” and “negligent” conduct in our law. If one foresees the consequences of one’s actions but proceeds to perform that action regardless, one’s conduct is said to be intentional. Negligence is the failure to foresee consequences which a reasonable person in the same position would have identified and taken steps to mitigate. Put differently, gross negligence is the total failure to give consideration to the consequences of one’s actions.

In Transnet Ltd t/a Portnet v Owners of the MV “Stella Tingas” and another 2003 (2) SA 473 (SCA), the Supreme Court of Appeal has previously held gross negligence to be “conscious risk-taking, a complete obtuseness of mind or, where there is no conscious risk-taking, a total failure to
take care”.

South African law adopted a dictum of the English courts in 2002 when considering the definition of wilful misconduct. It was defined to be “far beyond negligence, even gross or culpable negligence” and doing that “which [one] knows and appreciates is wrong, and is done or omitted regardless of the consequences”.

The definition of gross negligence stops at the intentional conduct of an individual. Conduct which goes beyond gross negligence, and would consequently be intentional conduct, is then classified as wilful misconduct.

In previous judgments, the courts have found that the cumulative effect of failing to carry out duties as directors of a company, in relation to preparing annual financial statements and holding annual general meetings, was beyond negligent conduct and therefore justified an order declaring the directors to be delinquent in terms of s162 of the Act. On another occasion the courts found that a “total disregard” for the King Code of Corporate Governance principles, relating to compliance with applicable law and adherence to rules of accepted practice, amounted to wilful misconduct and gross negligence.

In the Cresswell case, the director had allowed a company to carry on business while being fully aware that the company was commercially insolvent and did not have reliable assets to meet its liabilities. The director also made personal withdrawals from the company bank account and contravened various sections of the Act such as making offers directly to the public for the sale of shares in the company without a prospectus. Further to this, the director failed to hold annual general meetings, keep minutes of meetings and accounting records, compile and submit annual financial statements to an annual general meeting, and follow proper procedure in the allocation of shares to directors and officers.

In conclusion, Davis, J, found that the case before him was far worse than the previous cases referred to, and that at the very least, the director, by his gross negligence, had been shown to be “delinquent”. The director was therefore held to be a “delinquent director” for a period of seven years which, in effect, disqualifies him from being a director of any company in terms of s69(8)(a) of the Act. 

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