Directors’ delinquency applications are open to abuse
Giving courts the power to declare directors delinquent was introduced in section 162 of the Companies Act 71 of 2008 as amended in 2011 as part of the overhaul of SA’s corporate law regime.
Unisa’s Rehana Cassim believes it is an innovative remedy available to shareholders and other stakeholders to hold company directors accountable.
‘The newly-adopted delinquency order sets out to raise standards of good behaviour expected of directors. It also protects the public from incompetent and dishonest directors.’
In an analysis on The Conversation site, Cassim points out that to be declared delinquent, a director must be guilty of serious misconduct. There must be a gross abuse of the director’s position, gross negligence, wilful misconduct or a breach of trust. However, poor decision-making, ordinary commercial misjudgment or a misguided reliance on incorrect professional advice are not enough for a delinquency order.
Cassim adds that as SA’s law – unlike the UK or US – has a much wider definition of who can act, the remedy is open to abuse. Employee representatives, trade unions, and company secretaries have the right to apply for a delinquency order.
‘And it gives one director or a single shareholder the power to bring delinquency proceedings. There is nothing to stop a disgruntled director or shareholder from doing so.’
Cassim says in the US, a single director or shareholder cannot apply to court for an order to remove a director. Instead, the application must be brought derivatively by the board of directors or a shareholder – in the company’s name, and not in their personal name.
In SA, a court has ruled that delinquency applications cannot be brought derivatively, but must be brought by a single shareholder, in the shareholder’s name.
Cassim believes abuse could be controlled much more effectively if shareholders or directors could bring delinquency proceedings derivatively.
‘The advantage of derivative procedures is that they have a good faith requirement. The derivative proceeding does not mean that the application is brought by a group. It means that the application is brought in law by the company, and not by the individual shareholder or individual director.’
He says this safeguard is missing when delinquency applications are brought by a director or shareholder in their own name.
‘It is important to guard against the abuse of delinquency applications, especially since the Companies Act has no safeguards to protect against such abuse. This remedy must be used responsibly and sensibly by those with the power to use it.’
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