As the director of a company, you have important responsibilities. According to the law, executing these duties to the benefit of the company should always be your priority. And failing to do so means that you fail in executing these legal duties. As a director, you must therefore ask: How do I avoid being a delinquent director?
Before we answer this question, let’s look at a few terms before we begin.
Director: This refers to a member of a board of a company, as defined by section 66 of the Companies Act No.71 of 2008, who is expected to execute their legal duties in accordance with this legislation.
Delinquent: According to the Merriam-Webster dictionary, delinquent means to “offend (be at fault) by neglect or violation of duty or of law”.
Probation: In the context of an application to declare delinquency or probation, this means that a director isn’t declared delinquent, but that they are unable to execute their responsibilities as expected and be held accountable for their actions (or inaction).
Responsibilities of Directors
To summarise, directors are by law obligated to fulfil the following core duties, as well as administrative and strategic responsibilities.
Core duties (Section 76 of the Act):
- Disclose any conflict of interest (Section 75)
- Use position and information for the company’s benefit
- Disclosure of material information
- Perform duties in good faith, in the best interest of the company and with care, skill and diligence that may reasonably be expected of a person carrying out such functions and having the same skill and experience as the director (i.e. the reasonable man/woman test)
Strategy and corporate structure:
- Duty to comply with the Act in relation to different types of companies (Section 8)
- Duty to comply with the company’s memorandum of incorporation (Section 13)
- Duty to manage the business affairs at the company (Section 66(1))
- Duty to carry on the business without trading recklessly or under insolvent conditions (Section 22)
Board structure and corporate administration:
- Duty to appoint board committees (Section 72)
- Duty to appoint an audit committee (Section 94) – only applicable in certain instances
- Duty to appoint a company secretary (Sections 84 and 86) – only applicable in certain instances
- Duty to call and convene shareholders’ meeting (Section 61)
- Duty to call and convene directors’ meetings (Section 73)
Accountability and assurance:
- Duty to keep company records (Section )
- Duty to keep accounting records (Section 28)
- Duty to comply with Chapter 3 of the Act (Section 34(1) and 94)
- Duty to pay directors’ remuneration in terms of the memorandum of incorporation and get it approved by shareholders by special resolution (Section 66 (8) and 66(9))
- Duty to appoint auditors (Sections 90 and 92) – only applicable in certain instances.
- Duty to obtain an independent review of the financial statements
Disclosure and transparency:
- Duty to prepare annual financial statements (Sections 29 and 30)
- Duty to prepare a directors’ report (Section 30(3))
- Duty to issue a prospectus (Section 100)
- Duty to disclose directors’ remuneration information (Section 30)
- Duty to file an annual return (Section 33)
Shareholder treatment:
- Duty to ensure that shareholders can exercise their voting power and rights (Section 2(2) and 58)
- Duty to facilitate a shareholders’ meeting (Section 61)
- Duty to operate within the framework of the company’s memorandum of incorporation (Section 15(3) and (4) and 36)
- Duty to operate in the best interests of the shareholders (Section 20(6) and (7) and 76(3))
The Companies Act not only serve to protect the interests of the company as an entity and its continued existence, but it also protects the workers as well as members of the public who may be affected by the delinquent behaviour. To ensure that this legislation is always improving, frequent updates are made. You can view all updates on the government website.
Consequences
Any stakeholder, such as a shareholder, fellow director, company secretary, prescribed officer, registered trade union, a representative of the employees of a company, the CIPC, the Takeover Regulation Panel and any organ of state, can lodge an application for delinquency or probation.
Failure to execute your duties and responsibilities as a director means that you can be declared delinquent and placed under probation or be declared delinquent and added to the list of delinquent directors on the CIPC website.
After legal proceedings, a verdict will be delivered to rule whether or not a person who has lodged an application is indeed a delinquent director or not.
Based on that order, such a person is immediately disqualified from being a director of a company, either conditional or unconditional. Unconditional means that the order can be for a lifetime, and conditional means that the time is determined by the court. Other penalties that may be given by the court are that the person undertake a programme of remedial education, complete community service, or pay compensation to any person adversely affected by delinquent behaviour.
As a business owner in the capacity of a director, you have to understand the severity of the responsibility on your shoulders and how it affects your employees and other stakeholders. Therefore, familiarise yourself with the duties and responsibilities of your role as stated in the Companies Act. This is how you will avoid being a delinquent director.
