South African company directors must understand amendments to delinquency provisions

Through the delinquency provisions, the Companies Act seeks to protect companies, the public and corporate stakeholders from a director who is unable and has proven that they are unable to effectively manage the company. A director acting in the manner contemplated in the delinquency provisions may result in the company, the public and corporate stakeholders incurring great financial losses or damages.

Amendments to the delinquency provisions

Certain amendments have recently been introduced to the delinquency provisions by the Companies Amendment Act No.16 of 2024 and the Companies Second Amendment Act No.17 of 2024. The amendments are not yet effective, but it is important for companies and directors to understand the changes before they come into effect.

The effect of the amendment is that the period within which a director may be declared delinquent or placed under probation is increased from 24 months to 60 months. It means that, once the amendments are in effect, a director will be capable of being declared a delinquent director or placed under probation if they were a director of the company within the 60-month period preceding the application to declare them delinquent.

A further amendment is that the court may, on good cause shown, extend the 60-month period where an application for a delinquency order or probation is instituted by the Companies and Intellectual Property Commission (CIPC) or the Takeover Regulation Panel.

The extension from 24 months to 60 months has several important implications for directors as they will be accountable for their actions for a longer period and their actions will be scrutinised for a longer duration. Stakeholders will have more time to gather evidence and make applications and directors who were previously beyond reach of the delinquency provisions due to the time barring provisions are now vulnerable to attack.

In light of the amendments, it is crucial that directors understand the grounds and consequences of being declared delinquent or placed under probation.

Who can lodge an application for delinquency or probation?

Under section 162 of the Companies Act, a director may be declared delinquent or placed under probation if an application is made by various stakeholders, including a shareholder, director, company secretory, prescribed officer, registered trade union, a representative of the employees of a company, the CIPC, the Takeover Regulation Panel and any organ of state.

What are the grounds for declaration of delinquency or probation?

The declaration of a director as delinquent or under probation is a serious measure, reserved for instances of significant misconduct or abuse of power by a director.

In terms of section 162(5) of the Companies Act, a director may be declared delinquent if they consent to serve or act in the capacity of a director while ineligible or disqualified, thus failing to meet the minimum qualification criteria to service a director. A director who acts in violation of an existing probation order under the Companies Act or the Close Corporations Act, demonstrating a disregard for legal constraints, may also be declared delinquent.

Other grounds include gross abuse of power which inflicts harm upon the company, including taking personal advantage of information or opportunities, engaging in conduct that amounts to gross negligence, wilful misconduct or breach of trust in a director’s duties to the company.

Directors may also be declared delinquent if they act in the name of a company without authority, acquiesce in the reckless conduct of the company’s business, are a party to acts or omissions calculated to defraud creditors, employees or shareholders, or acts or omissions with other fraudulent purposes. Directors repeatedly subject to compliance notices or similar enforcement mechanisms for similar conduct, and who have at least twice been convicted of an offence or have been subject to administrative fines or similar penalties risk being declared delinquent.

Additionally, within five years, if an individual was a director of one or more companies, a managing member of one or more close corporations, controlled or participated in the control of a juristic person that was convicted of an offence or subjected to an administrative fine or other penalty, this may be grounds for a declaration of delinquency.

The grounds upon which a director may be placed under probation are set out in section 162(7) of the Companies Act and include where the director is present at a meeting and fails to vote against a resolution despite the company’s inability to satisfy the solvency and liquidity test. Failing to vote against a resolution contemplated in this paragraph is a failure by a director to act in the best interests of the company, as such action or omission may lead to the company being exposed to unnecessary financial risk.

A director may be placed on probation if acting in a manner materially inconsistent with their duties as a director, or if acting in, or supporting a decision of the company to act in, a manner determined oppressive or unfairly prejudicial, as per section 163(1) of the Companies Act.

A director may also face probation if, within a period of 10 years from 1 May 2011, they have been a director of more than one company or a managing member of more than one close corporation and during that time two or more of those companies or close corporations each failed to fully pay all of their creditors or meet all of their obligations. This applies except in terms of a business rescue plan resulting from a board resolution or a compromise with creditors in terms of section 155 of the Companies Act.

What are the consequences of a declaration of delinquency or probation?

A declaration of delinquency on the basis that the director consented to serve as a director or acted in the capacity of a director while ineligible or disqualified, or the director whilst under an order of probation acted in a manner that contravened that order, is severe, and will subsist for the lifetime of the person declared delinquent. A declaration of delinquency on this basis will result in the director being prohibited from serving as a director on the board of any company.

However, if the director is declared delinquent for any other reason, that declaration may be subject to conditions deemed appropriate by the court. These conditions can limit the application of the declaration to specific categories of company. Additionally, the delinquency will typically subsist for seven years from the date of the court order, although the court may extend this period if necessary.

When a director is placed under probation, they are generally prohibited from serving as a director of any company. However, the court may limit the application of the probation to certain categories of companies. The probation cannot exceed five years and may include conditions the court considers appropriate.

Courts also have the discretion to impose additional conditions alongside declaration of delinquency and probation. These conditions may include:

• directors being required to undertake educational programs relevant to their misconduct, thus promoting better understanding of their duties
• directors being required to engage in community service
• directors being required to compensate individuals adversely affected by their conduct, providing a measure of justice to the victims of the directors misconduct
• an order that the director’s future participation as director in any company be supervised by a mentor, ensuring guidance and oversight; and/or
• in respect of probation orders, an order that the director is restricted to serving as a director only in private companies or a company where they are a sole shareholder, reducing the risk of broader corporate harm.

Directors must manage the affairs of the company carefully, in a proper manner consistent with the Companies Act, in order to avoid being declared delinquent or under probation. A declaration of delinquency has far-reaching consequences in that a person who is declared delinquent or under probation may not be nominated or appointed as a director on the board of directors of certain companies. Directors may also find themselves personally liable for losses or damages suffered by a person, shareholder or company as a result of their conduct which leads to a declaration of delinquency or probation.

Co-written by Vuyo Khathide of Pinsent Masons.