Directors and the “Delinquency” danger

“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” (extract from judgment below)

Directors face many challenges, not least amongst them the constant danger of being held personally liable for any failure to comply with their statutory duties.  In addition to facing civil claims for losses sustained, and even possible criminal liability, directors risk being declared “delinquent”.

And that’s no small thing, with serious categories of misconduct risking disqualification from holding any directorship or senior management position for a period ranging from 7 years to a lifetime.

A range of less serious categories of misconduct could result in “probation” – risking disqualification for up to 5 years, supervision by a mentor, remedial education, community service and payment of compensation.

Who can apply for a delinquency order?

Applying for a delinquency order is an effective means of holding directors to account. Thus, most applications are by the affected company itself, its shareholders, its officers, or trade unions/employee representatives. Application can also be made by the Takeover Regulation Panel, certain organs of state and the CIPC (Companies and Intellectual Property Commission).

7 years in the wilderness after an International Airport plan fails

Now, in what could be a sign of things to come, the CIPC has itself taken the bull by the horns and applied successfully for a delinquency order –

  • The CIPC asked for a lifetime delinquency order against a director of a public company which had, it said, bought land for some R140m in order to erect an international airport at a cost of R1bn.
  • The company raised substantial sums of money from public share subscriptions but no Civil Aviation licence to proceed with the planned airport ever eventuated (there was dispute over whether it had even been applied for).
  • Allegations were made that the company continued trading whilst commercially insolvent (at the end it had R600 in its bank account), amounts had been transferred from the company bank account to the director’s bank account, and the company had no proper accounting system.
  • Finding for the CIPC, the Court held that “It was grossly negligent for a director to have allowed a company to continue business in so parlous and insolvent a set of circumstances, to extract company cash in order to pay directors fees and to continue business in the clear knowledge that the Civil Aviation Authority was not prepared to grant permission for the crucial element of [the company]’s business and to allow a public company to operate without proper accounting systems.”
  • The Court declined to grant the lifetime delinquency order asked for, but declared the director delinquent for 7 years. That’s 7 years in the wilderness for him as far as any possibility of company directorship or senior management position is concerned.

Note that although this particular case involved a public company, these provisions apply to all directors of all types of company.

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