Should a business decide to pursue a delinquency application, it should start by gathering comprehensive evidence, removing the director from the board and seeking legal advice
The Companies Second Amendment Act 17 of 2024 became effective on 27 December 2024, amending the provisions relating to director and officer liability and delinquency.
These amendments follow recommendations made by the Zondo state capture commission and aim to address some of the actions needed for South Africa to exit the Financial Action Task Force greylist.
The Zondo commission highlighted the fact that it often “takes years for the facts of delinquency, especially in [state-owned entities] to be uncovered”. Accordingly, the commission recommended that the Companies Act 71 of 2008 (Companies Act) be amended to extend the time period within which applications for declarations of delinquency may be brought so that “steps can still be taken by the executive authority of a state-owned enterprise to ensure that [delinquent directors] are declared delinquent and thereby prevented from serving on the boards of companies”.
The changes
The first change means that, on good cause shown, the period to institute a claim for loss or damages under section 77 of the Companies Act, which outlines director and officer liability, can now be extended by a court beyond the existing three-year period.
The second change concerns amendments to section 162 of the Act, which previously stipulated that an application to declare a director delinquent could be instituted against a person who is currently a director, or was a director, of a particular company within two years preceding the application.
As a result of the second change, the period to declare a director delinquent or under probation has now been extended from two years to five years after that person ceases to be a director, or a longer period determined by a court on good cause shown (which extension was not previously possible).
The second change means that even where a director is no longer serving on the board of the relevant company, they can still face a delinquency application if such application is brought within five years of the termination of their service on the board.
Amendments to legislation do not usually apply retrospectively but the changes to these sections specifically provide for the retrospective application of these amendments.
Reasons for the changes
Delinquency refers to instances where a director’s conduct falls within the grounds specified in section 162(5) of the Companies Act, which includes them acting unlawfully, negligently or in a manner that breaches their fiduciary duties; in a way that prejudices the company, its shareholders or creditors or is grossly abusive, reckless or in flagrant disregard of the law or the company’s interests.
The Companies Act and the common law prescribe the standard of conduct for directors when executing their duties as such. Failure to uphold these standards can result in personal liability and statutory consequences being imposed on them. This includes being declared delinquent.
In recent years, there have been several high-profile instances of applicants seeking director delinquency orders in South Africa, particularly in the wake of corporate and state capture scandals. These cases have highlighted the need for stricter enforcement of the Companies Act and for greater accountability among company directors.
The Act has a clear mechanism to root out directors who do not conduct themselves in accordance with the required legal standards and to ensure that individuals, who have proved through their failure to adhere to the required standards of probity and care that they should not hold positions of authority and trust, are prevented from serving as directors in any company.
Extending the time period within which to bring director liability and delinquency claims assists in ensuring that directors are held accountable for their actions. Further, the amendments’ retrospective application means that they also apply to past actions, so historical misconduct can be addressed.
The overarching objective of these remedies of director and officer liability and delinquency is to safeguard organisations, investors and South Africa from future maladministration and corruption.
Steps to avoid director delinquency
To mitigate the risk of delinquent director cases, businesses should ensure that:
- A proper due diligence is conducted on a prospective director before their appointment, including confirming that they are not disqualified or ineligible from being a director in terms of section 69 and 70 of the Companies Act;
- At the start of the tenure of a directorship, the director signs and agrees to abide by the board’s code of conduct, which should clearly set out the standard of conduct expected;
- Directors have declared any conflict of interest in writing upon appointment. This should be reviewed annually and updated. Further, at the start of each board meeting, a declaration of interests should be a standing agenda item and should be minuted;
- Adequate training is offered to directors so that they understand their fiduciary duties, roles and responsibilities and corporate governance best practice;
- The company minutes and other records are properly and accurately kept in respect of discussions, decisions and actions conducted by directors; and
- Comprehensive directors’ and officers’ liability insurance is in place.
Should a business decide to pursue a delinquency application, it should start by gathering comprehensive evidence, removing the director from the board and seeking legal advice.
The December 2024 amendments to the time period within which to bring director liability and delinquency claims are to be welcomed as part of a broader effort to guarantee a transparent and robust business environment that supports good governance, ethical business standards, investment and sustainable growth.
Vanessa Jacklin-Levin and Daniel Pretorius are partners at Bowmans South Africa and Thomas Erskine is a candidate legal practitioner.
