Director Delinquency: Legal Framework and Case Law

According to the Oxford Dictionary, a delinquent is defined as “a young person who tends to commit crime” or “showing a tendency to commit crime (especially of young people or their behaviour).” Similarly, the Cambridge Dictionary describes a delinquent as “a person, usually young, who behaves in a way that is illegal or not acceptable to most people.” Interestingly, these definitions emphasize youthful behavior. Recently, however, the term “delinquent” has been increasingly attributed to adults with corporate responsibilities rather than to juveniles.

A natural person or a corporation that engages in criminal conduct can be defined as delinquent.

Governance and Legal Requirements

King IV Code

According to King IV, the governing body should be composed of an appropriate balance of knowledge, skills, experience, diversity, and independence to discharge its governance role and responsibilities objectively and effectively (Principle 7).

Companies Act No. 71 of 2008

Sections 75 and 76 of the Companies Act No. 71 of 2008 articulate directors’ statutory duties. Section 75 mandates directors to disclose personal financial interests that they or related persons have in matters considered by the board, and to recuse themselves from such meetings. Section 76 requires directors to act honestly, in good faith, and in the best interests of the company. Directors’ duties and responsibilities are detailed in the entity’s board charter to ensure role clarity and adherence to expectations.

Misconduct and Consequences

Misrepresentation of board decisions for personal gain constitutes delinquency. Such conduct warrants prosecution in accordance with the law. Directors are penalized not for mere mistakes but for reckless disregard of rules and laws. It is crucial for directors to take their duties and responsibilities seriously, including thoroughly understanding board papers and ensuring adequate time for review. Directors cannot not plead ignorance as a defence. New directors should undergo an induction process to fully comprehend the entity’s operations. Probationary periods can also be implemented to ensure performance before confirmation.

The power to appoint and dismiss directors should be clearly articulated in the Shareholders Agreement or relevant legislation for State-Owned Entities (SOEs). This power should be exercised diligently to maintain a competent and relevant board. Directors should have appropriate qualifications and experience for their roles. Accepting a role for which one is unsuited predisposes one to delinquent behaviour.

Non-executive directors should avoid interfering with operations to maintain objective oversight. The board should set a corporate governance framework, limits of authority, charters and policies including those related to procurement (and associated procedures) and avoid direct involvement in procurement to prevent corruption and criticism.

Ethical Responsibility

Directors should speak out against unethical practices, notwithstanding the fear of victimisation. Each director has a duty to uphold good corporate governance and principled conduct. Entities should implement a whistle-blower policy to protect individuals reporting malfeasance and ensure reports can be made anonymously. This mechanism can deter potential delinquent behaviour among directors and executives.

Prominent Case Law

1. The case of the late Dudu Myeni, the former South African Airways (SAA) chairperson, serves as a notable example. In 2020, the High Court in Pretoria declared Myeni a delinquent director due to her conduct in leading SAA’s board. Judge Ronel Tolmay’s judgment cited Myeni’s dishonesty, recklessness, and gross negligence. The declaration barred Myeni from holding any directorship.
2. Another significant case involves Kuben Moodley, who faced charges of fraud and corruption related to his directorship. Moodley’s involvement in the Gupta-linked corruption scandal led to his arrest and highlighted the severe repercussions of delinquent behaviour in corporate governance.

Directors declared delinquent are disqualified from serving on any company boards and cannot incorporate new companies, as incorporators are the first directors by law. They can also be held criminally liable under section 214 of the Companies Act. Directors must understand section 162 of the Companies Act (declaration of delinquent directors) to avoid the risk of being declared delinquent.

Many of these and other views were discussed at a recent forum by members of the SA Institute of Directors. We would like to hear your views on this and other topical matters. We are available to assist you to carry out Board Performance Evaluations as part of our corporate governance offering. Contact us today for a quote.