4 June 2020 by and Corporate & Commercial Alert

Delinquent Directors

In a judgment delivered by Judge Tolmay on 27 May 2020 in Organisation Undoing Tax Abuse and Another v Myeni and Others (case number 15996/2017), the High Court of South Africa (Gauteng Division, Pretoria) declared Dudu Myeni, the previous non-executive chairperson of South African Airways SOC Limited (SAA), a “delinquent director” in terms of the Companies Act 71 of 2008 (Companies Act). The court found that Ms Myeni acted dishonestly, recklessly and with gross negligence and breached her fiduciary duties during the tenure of her directorship, causing significant harm to both SAA and the country as a whole.

An order of delinquency in these circumstances is to subsist for a minimum of seven years. However, given Ms Myeni’s conduct, the court found it appropriate to impose a lifelong delinquency order, which Ms Myeni may apply to have suspended after three years if certain circumstances exist

The Companies Act contains a number of grounds on which a person may be declared a delinquent director. These include that a person, while a director:

  • grossly abused the position of director;
  • took personal advantage of information of an opportunity to gain an advantage for another person (other than the company on whose board the director serves) or to knowingly cause harm to the company or a subsidiary of the company;
  • intentionally, or by gross negligence, inflicted harm upon the company or a subsidiary of the company; or
  • acted in a manner that amounted to gross negligence, wilful misconduct or breach of trust in relation to the performance of the director’s functions within, and duties to, the company.

In the Myeni case, Tolmay J, referred to the case of Gihwala v Grancy Property Ltd 2017 (2) SA 337 (SCA) and noted that a declaration of delinquency can only be made in consequence of serious misconduct. However, where grounds of delinquency are established, the court must grant this order and has no discretion in this regard (only in respect of the conditions that may be attached to the order).

The court explored the concept of “serious misconduct on the part of a director” and noted that it involves “a person who grossly abuses the position of director” and that it is equivalent to “recklessness”. It was confirmed that “recklessness” and “gross negligence” involve “a complete obtuseness of mind…or a total failure to take care” and “an entire failure to give consideration to the consequences of one’s actions, in other words, an attitude of reckless disregard of such consequences, which includes both foreseen and unforeseen consequences”.

In a 114-page judgment, the court analysed Ms Myeni’s conduct with reference to the so-called “Emirates Deal” and “Airbus Swap Transaction”. The court held that Myeni had frustrated and ultimately caused the demise of the lucrative “Emirates Deal”, she had no reasonable grounds to block it, she knowingly made misrepresentations, deliberately acted dishonestly and grossly abused her powers. With regards to the “Airbus Swap Transaction”, she had taken no care with regards to a significant letter that jeopardised the entire “Airbus Swap Transaction” and exposed SAA to financial ruin, she unilaterally renegotiated the transaction with Airbus, following nine months’ work by specialists and experts on the existing deal, she backtracked on the resolution authorising the deal and wilfully made misrepresentations to the then Minister of Finance in a last attempt to alter the terms of the transaction. Having regard to the foregoing, and other instances of abuse, gross negligence, dishonesty and recklessness by Ms Myeni, the court found that Ms Myeni breached her fiduciary duties to act in good faith, for a proper purpose and in the best interests of SAA and inflicted irreparable harm to SAA and the country. The judgment and evidence of the case are also to be sent to the National Prosecuting Authority to determine whether an investigation into possible criminal conduct should follow.

The court also reiterated two important principles – firstly, that a non-executive director is not absolved of his/her fiduciary duties. The legal duties of all directors (executive and non-executive) are the same. Secondly, a director cannot hide behind the collective board – each director must take responsibility for his or her own actions.

Only time will tell whether Ms Myeni will take steps to appeal the finding against her or whether the National Prosecuting Authority will launch an investigation into possible criminal conduct. In the meantime, it serves as a reminder to directors, both individually and acting as a collective, to take steps to ensure that they abide by the high standards expected of them.

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