No CrossRef data available.
We use cookies to distinguish you from other users and to provide you with a better experience on our websites. Close this message to accept cookies or find out how to manage your cookie settings.
We use cookies to distinguish you from other users and to provide you with a better experience on our websites. Close this message to accept cookies or find out how to manage your cookie settings.
Published online by Cambridge University Press: 09 November 2020
Section 162 of the South African Companies Act 71 of 2008 empowers courts to declare directors delinquent and hence to disqualify them from office. This article compares the judicial disqualification of directors under this section with the equivalent provisions in the United Kingdom, Australia and the United States of America, which have all influenced the South African act. The article compares the classes of persons who have locus standi to apply to court to disqualify a director from holding office, as well as the grounds for the judicial disqualification of a director, the duration of the disqualification, the application of a prescription period and the discretion conferred on courts to disqualify directors from office. It contends that, in empowering courts to disqualify directors from holding office, section 162 of the South African Companies Act goes too far in certain respects.
BA (cum laude), LLB (cum laude), LLM (cum laude) (Witwatersrand), LLD (Unisa). Associate professor, Department of Mercantile Law, School of Law, University of South Africa; attorney; notary public of the High Court of South Africa. This article is based on sections of the author's doctoral thesis.
1 SA Companies Act, sec 69(8)(a). See also Rabinowitz v Van Graan and Others 2013 (5) SA 315 (GSJ), para 20; Grancy Property Limited v Gihwala 2014 JDR 1292 (WCC), para 159; Lewis Group Limited v Woollam 2017 (2) SA 547 (WCC), para 5.
2 Kukama v Lobelo 2012 JDR 0062 (GSJ), para 22; Msimang NO and Another v Katuliiba and Others [2013] 1 All SA 580 (GSJ), para 32.
3 SA Companies Act, sec 162(6).
4 Sec 71(3) permits the board of directors to remove a director from office in certain defined instances.
5 du Plessis, JJ and de Koker, JN “Analyses, perspectives and jurisdictional overview” in du Plessis, JJ and de Koker, JN (eds) Disqualification of Company Directors: A Comparative Analysis of the Law in the UK, Australia, South Africa, the US and Germany (2007, Routledge) 1 at 5Google Scholar.
6 If a director falls under any of the grounds of ineligibility or disqualification set out in sec 69 during his or her term of office, he or she would automatically cease to be entitled to continue to act as a company director.
7 It is noteworthy that, under sec 162(7) of the SA Companies Act, a court may also make an order placing a person under probation. The maximum period for which a probation order subsists is five years. A person under a probation order may still act as a director, but only to the extent permitted by the order. Since a probation order does not necessarily disqualify a person from acting as a director, this article is confined to an analysis of delinquency orders.
8 SA Companies Act, sec 7(b)(i).
9 Id, sec 7(j).
10 Id, sec 7(l).
11 2013 JDR 1360 (WCC), para 85.
12 2012 (5) SA 497 (WCC), para 26.
13 While company law in Australia is historically based on UK company law, present-day company law in Australia under the Australian Corporations Act is less dependent on UK company law; see further Bruner, CM Corporate Governance in the Common-Law World: The Political Foundations of Shareholder Power (2013, Cambridge University Press) at 66CrossRefGoogle Scholar.
14 The USA has a federal system where federal law is enacted by the US Congress while state law is enacted by individual state legislatures. Each state has its own legal system and judiciary, which are separate from the federal system. Generally, state law provides for corporate law matters, which are regulated by the 50 states. This article deals with the judicial removal of directors under state, not federal, law. For a discussion of the judicial removal of a director of a public company on application by the Securities and Exchange Commission under the Securities Act 1933, the Securities Exchange Act 1934 and the Sarbanes-Oxley Act 2002, see HM Farhan and JN de Koker “The United States” in du Plessis and de Koker (eds) Disqualification of Company Directors, above at note 5, 155 at 163–65.
15 Grancy v Gihwala, above at note 1, para 155.
16 Msimang v Katuliiba, above at note 2, para 29; Gihwala and Others v Grancy Property Limited and Others 2017 (2) SA 337 (SCA), para 14; Lewis v Woollam, above at note 1, para 40.
17 Rich v Australian Securities and Investments Commission [2004] 220 CLR 129, para 49.
18 [1988] 2 All ER 692 at 696.
19 Ibid. See further Re Gibson Davies Ltd [1995] BCC 11 at 14.
20 1990 BCC 23 at 26.
21 Re Westminster Property Management Ltd Official Receiver v Stern 2001 BCC 121, para 36.
22 [2000] BCC 998 at 1007.
23 See for instance: Rich v ASIC, above at note 17, paras 32, 35 and 50–52; Australian Securities and Investments Commission v Beekink [2007] FCAFC 7, paras 80–91; Australian Securities and Investments Commission v Axis International Management Pty Ltd (No 6) [2011] FCA 811 (2011), para 9; Gilfillan and Others v Australian Securities and Investments Commission [2012] NSWCA 370, paras 180–85.
24 Above at note 2, para 22.
25 Above at note 2, para 32.
26 CDDA, sec 1.
27 See for example: Arizona Revised Statutes, sec 10-809(A); California Corporations Code, sec 304; Connecticut General Statutes, sec 33-743(a); Pennsylvania Business Corporation Law, sec 1726(c); and Washington Business Corporation Act, sec 23B.08.090(1).
28 SA Companies Act, secs 162(2), (3) and (4).
29 Plessis, J du and Delport, P “‘Delinquent directors’ and ‘directors under probation’: A unique South African approach regarding disqualification of company directors” (2017) 134/2 South African Law Journal 274 at 277Google Scholar.
30 Id at 293.
31 CDDA, secs 6, 7(1)(b) and 8.
32 Id, sec 16(2).
33 This is an offence committed outside Great Britain in connection with the “promotion, formation, management, liquidation or striking-off of a company (or any similar procedure)” or “a person being an administrative receiver of a company (or holding a similar position)” and “which corresponds to an indictable offence under the law of England and Wales” or Scotland: CDDA, sec 5A(3).
34 Id, sec 10(1).
35 These instances are: disqualification on conviction of an indictable offence in connection with the promotion, formation, management, liquidation or striking-off of a company; disqualification for persistent breaches of company legislation; and disqualification for fraud in the winding-up of a company: id, secs 2, 3, 4 and 16(2).
36 Australian Corporations Act, part 2D.6.
37 T Blackie and JJ du Plessis “Australia” in du Plessis and de Koker (eds) Disqualification of Company Directors, above at note 5, 69 at 101.
38 Delaware Code, title 8, chap 1.
39 See, for example: California Corporations Code, sec 304; Washington Business Corporation Act, sec 23B.08.090(1); New York Business Corporation Law, sec 706(d); and Rhode Island Business Corporation Act, sec 7-1.2-805(d). Under the latter two statutes, the attorney general may also apply to court to remove a director from office.
40 South Carolina Code of Laws, sec 33-8-109(a).
41 Above at note 1.
42 A derivative action relates to proceedings instituted by persons given standing to litigate in their own names for and behalf of a corporation in respect of wrongs done to the corporation (see SA Companies Act, sec 165 and Lewis v Woollam, id, para 27). A derivative action is brought by an applicant on behalf of a company in order to protect the company's legal interests. Where a wrong is done to the company, the “proper plaintiff” is the company itself and not the shareholders; see Foss v Harbottle (1983) 2 Hare 461, 67 ER 189 and Cassim, MF The New Derivative Action under the Companies Act: Guidelines for Judicial Discretion (2016, Juta) at 5–8Google Scholar. Therefore, the derivative action is an exception to the “proper plaintiff” rule.
43 Lewis v Woollam, id, paras 45–49.
44 Id, para 49. For a critique of this judgment, see Cassim, R “The launching of delinquency proceedings under the Companies Act 71 of 2008 by means of the derivative action: Lewis Group Limited v Woollam 2017 (2) SA 547 (WCC)” (2017) 38/3 Obiter 673Google Scholar.
45 Connecticut General Statutes, secs 33-743(a) and (b).
46 District of Columbia Code, sec 29-306.09(a).
47 Idaho Code, sec 30-29-809(2).
48 South Dakota Business Corporation Act, sec 47-1A-809.
49 Pennsylvania Business Corporation Law, sec 1726(c).
50 Above at note 1.
51 Id, para 86.
52 Ibid.
53 Id, para 87.
54 “Report by the Directorate of Market Abuse” (Financial Services Board press release, 28 September 2016), available at: <http://www.fsca.co.za/News%20Documents/2016-09-28%20(2).pdf> (last accessed 30 September 2020); C Smith “Consumer watchdog cleared of Lewis allegations” (30 September 2016) fin24, available at: <http://www.fin24.com/Companies/Retail/consumer-watchdog-cleared-of-lewis-allegations-20160930> (last accessed 30 September 2020); S Cassidy “Woollam shrugs off ‘dirty tricks and lies’ in Lewis fight” (30 September 2016) IOL, available at: <http://www.iol.co.za/business-report/companies/woollam-shrugs-off-dirty-tricks-and-lies-in-lewis-fight-2074840> (last accessed 30 September 2020).
55 Grancy v Gihwala, above at note 1, paras 156 and 176; Westerhuis v Whittaker 2018 JDR 0825 (WCC), para 38.
56 Lewis v Woollam, above at note 1, para 18.
57 Ibid.
58 Above at note 18 at 696.
59 Only the CIPC, the Takeover Regulation Panel and an organ of state may rely on the grounds listed in (vi), (vii) and (viii) above: SA Companies Act, secs 162(3)(b)(i) and 162(4)(b). For case examples of the application of the grounds of delinquency, see: Kukama v Lobelo, above at note 2; Lobelo v Kukama 2013 JDR 1434 (GSJ); Msimang v Katuliiba, above at note 2; Rabinowitz v Van Graan, above at note 1; Cape Empowerment v Druker, above at note 11; Demetriades and Another v Tollie and Others (1995/2014) [2015] ZANCHC 17 (18 September 2015); Gihwala v Grancy, above at note 16; Lewis v Woollam, above at note 1; and Companies and Intellectual Property Commission v Cresswell and Others (21092/2015) [2017] ZAWCHC 38 (27 March 2017). For discussion of the grounds of delinquency, see further: Cassim, R “Governance and the board of directors” in Cassim, FHI (ed) Contemporary Company Law (2nd ed, 2012, Juta) 400 at 436–37Google Scholar; and Cassim, R The Removal of Directors and Delinquency Orders under the South African Companies Act (2020, Juta) at 257–75Google Scholar.
60 See, for example: Connecticut General Statutes, sec 33-743(a); District of Columbia Code, sec 29-306.09(a)(1); and South Dakota Business Corporation Act, sec 47-1A-809.
61 See, for example: Connecticut General Statutes, sec 33-743(a); Washington Business Corporation Act, sec 23B.08.090(1); and California Corporations Code, sec 304.
62 The MBCA, sec 8.09(a) states that a court may remove a director from office in proceedings commenced by or in the name of the company if the court finds that the director “grossly abused the position of director”.
63 Connecticut General Statutes, sec 33-743(a).
64 District of Columbia Code, sec 29-306.09(a)(1).
65 South Dakota Business Corporation Act, sec 47-1A-809.
66 Instead of applying to court for a disqualification order, in certain circumstances the secretary of state may accept a disqualification undertaking from a director if it is expedient to do so in the public interest: CDDA, sec 1A. A disqualification undertaking has the same effect as a disqualification order made by a court after a court hearing.
67 Id, sec 2.
68 Id, sec 3.
69 Id, sec 4.
70 Id, sec 5.
71 Id, sec 5A.
72 Id, sec 9A.
73 Id, sec 10.
74 Id, secs 6 and 8.
75 Belcher, A “What makes a director fit: An analysis of the workings of section 17 of the Company Directors Disqualification Act 1986” (2012) 16 The Edinburgh Law Review 386 at 388CrossRefGoogle Scholar; Davies, PL and Worthington, S Gower Principles of Modern Company Law (10th ed, 2016, Sweet & Maxwell) at 249Google Scholar; Hannigan, B Company Law (4th ed, 2016, Oxford University Press) at 175Google Scholar.
76 CDDA, secs 12C(1)(a), 12C(4)(a) and (b) and sched 1.
77 Secretary of State for Trade and Industry v Lubrani (No 2) [1998] BCC 264 at 268; Re Bath Glass Ltd (1998) 4 BCC 130 at 132; Re Migration Services International Ltd [2000] BCC 1095 at 1105.
78 A detailed analysis of the ground of unfitness to be a director under the CDDA is beyond the scope of this article. For further discussion of this topic, see: Walters, A “Directors’ duties: The impact of the UK Company Directors Disqualification Act 1986” (2000) 21/4 Company Lawyer 110 at 113–19Google Scholar; Kershaw, D Company Law in Context (2nd ed, 2012, Oxford University Press) at 807–10Google Scholar; Davies and Worthington Gower Principles, above at note 75 at 241–43; Hannigan Company Law, above at note 75 at 379–83.
79 Australian Corporations Act, secs 1317E, 180(1), 181(1), 182(1) and 183(1).
80 Id, sec 206C(1)(b).
81 Id, sec 206C(2)(b).
82 See Austin, RP and Ramsay, IM Ford, Austin and Ramsay's Principles of Corporations Law (17th ed, 2018, LexisNexis Butterworths) at 277Google Scholar.
83 This provision empowers ASIC to apply to court to disqualify a director who has been disqualified under the law of a foreign jurisdiction. Only New Zealand is currently designated as a prescribed foreign jurisdiction: Corporations Regulations 2001, reg 2D.6.01.
84 For the purposes of sec 162, “legislation” is defined as meaning any national or provincial legislation: “(a) relating to the promotion, formation or management of a juristic person; (b) regulating an industry or sector of an industry; or (c) imposing obligations on, prohibiting any conduct by, or otherwise regulating the activities of, a juristic person”.
85 If an organ of state relies on this ground for delinquency, the legislation in question must be administered by that organ of state.
86 Cook: Geoffrey v Hesber Impala (Pty) Ltd and Others (2014/45832) [2016] ZAGPJHC 23 (19 February 2016), paras 60–61.
87 For a discussion of the meaning of the phrase “for cause”, see: Petition of Korff 198 App Div 553 (1921) at 559; Fox v Cody 141 Misc 552, 252 NYS 395 (Sup Ct 1930) at 554; Markovitz v Markovitz 8 A.2d 46 (Pa 1939) at 48; Campbell v Loew's Inc 134 A.2d 852 (1957) at 860–61; Bolling, DMM “Removal of directors in closely held corporations” (1959) 12 University of Florida Law Review 234 at 234Google Scholar; Ferber, KS Corporation Law (2002, Prentice Hall) at 40–41Google Scholar; and Cox, D and Hazen, TL Corporations (2nd ed, 2003, Aspen Publishers) at 168Google Scholar.
88 SA Companies Act, sec 162(5)(a), (5)(b) and (6)(a).
89 Id, sec 162(6)(b). Some conditions a court may impose are that the director must undertake a designated programme of remedial education (id, sec 162(10)(a)) or be involved in a designated programme of community service (id, sec 162(10)(b)).
90 Above at note 1, para 194.
91 CDDA, secs 3(5) and 5(5).
92 Id, sec 8(4).
93 See Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164, CA at 174, where the UK Court of Appeal set out useful guidelines to determine the appropriate period of disqualification in instances where the maximum period of disqualification is 15 years.
94 Australian Corporations Act, secs 206C(1), 206E(1) and 206EAA(1).
95 Id, sec 206D(1).
96 Re HIH Insurance Ltd (in prov liq); ASIC v Adler [2002] NSWSC 483, para 56; Elliott v Australian Securities and Investments Commission; Plymin v Australian Securities and Investments Commission [2004] VSCA 54 (2004); Rich v ASIC, above at note 17, paras 48–50; ASIC v Axis, above at note 23, paras 8–9.
97 See, for example: California Corporations Code, sec 304; Connecticut General Statutes, sec 33-743(c); District of Columbia Code, sec 29-306.09(c); New York Business Corporation Law, sec 706(d); Pennsylvania Business Corporation Law, sec 1726(c); Rhode Island Business Corporation Act, sec 7-1.2-805(d); and Washington Business Corporation Act, sec 23B.08.090(2).
98 SA Companies Act, sec 162(11) and (12).
99 For a discussion of the application to suspend delinquency orders, see Cassim, R “The suspension and setting aside of delinquency and probation orders under the Companies Act 71 of 2008” (2019) 22 Potchefstroom Electronic Law Journal 1CrossRefGoogle Scholar.
100 SA Companies Act, sec 162(2), (3) and (4). See further Companies and Intellectual Property Commission v Zwane (73548/2018) [2019] ZAGPPHC 381 (8 August 2019), para 24.
101 It is arguable that the Prescription Act 68 of 1969, which deals with the effect of the effluxion of time on obligations, would not apply in this instance because it applies primarily to the acquisition of ownership by prescription, the acquisition and extinction of servitudes by prescription and the prescription of debts, while sec 162 of the SA Companies Act relates to a declaration that affects a person's status.
102 By way of comparison, prescription on a debt begins to run as soon as the debt is due, but the debt is not regarded as being due until the creditor has knowledge of the identity of the debtor and the facts from which the debt arises: Prescription Act 68 of 1969, sec 12(3). See further Cassim, R “Delinquent directors under the Companies Act 71 of 2008: Gihwala v Grancy Property Limited 2016 ZASCA 35” (2016) 19 Potchefstroom Electronic Law Journal 1 at 15CrossRefGoogle Scholar.
103 CDDA, sec 7(2).
104 Ibid.
105 [1996] 4 All ER 289 at 302.
106 Id at 297.
107 Ibid.
108 Re Probe Data Systems Ltd (No 3), Secretary of State for Trade and Industry v Desai [1992] BCC 110 at 118; Re Polly Peck International plc (In Administration) (No 3), Secretary of State for Trade and Industry v Ellis [1993] BCC 890 at 893–94; Secretary of State v Davies, above at note 105 at 296.
109 Id at 298.
110 This is made clear by the word “must” in sec 162(5). It should, however, be noted that, with regard to the ground for delinquency in sec 162(5)(f) of the SA Companies Act (director of a company that is convicted of an offence within a period of five years), which may only be raised by an organ of state, a court has discretion to grant a declaration of delinquency since the order will only be granted if “the court is satisfied that the declaration of delinquency is justified”.
111 CDDA, secs 2, 3, 4, 5, 5A, 8 and 10. The only two instances when a disqualification order is mandatory under the CDDA are under sec 6 relating to the disqualification of unfit directors of insolvent companies and sec 9A relating to a competition disqualification order.
112 See for instance sec 206C(1)(b).
113 MBCA, sec 8.09(a).
114 Refer for example to: DGCL, sec 225(c); California Corporations Code, sec 304; Connecticut General Statutes, sec 33-743(a); Pennsylvania Business Corporation Law, sec 1726(c); and Washington Business Corporation Act, sec 23B.08.090(1).
115 See Griffin, S “The disqualification of unfit directors and the protection of the public interest” (2002) 53/3 Northern Ireland Legal Quarterly 207 at 210Google Scholar.
116 Sirodoeva-Paxson, ON “Judicial removal of directors: Denial of directors’ license to steal shareholders’ freedom to vote” (1999) 50 Hastings Law Journal 1 at 6Google Scholar.
117 Maynard v Office Appliances (SA) (Pty) Ltd 1927 WLD 290 at 293; Kronenberg v Sullivan County Steam Laundry Co 91 NYS 2d 144 (1949), para 8; Yende v Orlando Coal Distributors (Pty) Ltd and Others 1961 (3) SA 314 (W); Breetveldt and Others v Van Zyl and Others 1972 (1) SA 304 (T); Wilkes v Springside Nursing Home, Inc Mass 353 NE 2d 657 (1976) at 662; Connolly v Bain 484 NW 2d 207 (Iowa App 1992) at 211; Demoulas v Demoulas 1996 WL 511519 (Mass Super Ct Pct 1, 1996), para 32; Mbethe v United Manganese of Kalahari (Pty) Ltd 2016 (5) SA 414 (GJ), para 59; CDH Invest NV v Petrotank South Africa (Pty) Ltd and Another 2018 (3) SA 157 (GJ), para 81.
118 CDH Invest v Petrotank, id, para 80.
119 Wilkes v Springside, above at note 117 at 662; Connolly v Bain, above at note 117 at 211; Demoulas v Demoulas, above at note 117, para 32.
120 See for example: Connecticut General Statutes, sec 33-743(a) and (d); District of Columbia Code, sec 29-306.09(a)(2) and (d); and South Dakota Business Corporation Act, sec 47-1A-809.
121 See for example: Arizona Revised Statutes, sec 10-809(A)(2); Michigan Business Corporation Act, sec 450.1514(1); South Carolina Code of Laws, sec 33-8-109(a); and Washington Business Corporation Act, sec 23B.08.090(1).
122 SA Companies Act, sec 162(6).
123 Above at note 16, para 145.
124 Above at note 105 at 302.