About delinquency - time bar to hold directors accountable extended to 5 years. Is it enough?

The Companies Amendment Act extends the time bar to hold directors accountable from 24 to 60 months, or even more with good cause. Professor Natesan says, “It’s a definite move in the right direction, but I question whether it is enough.”

The amendment is a direct result of the Zondo Commission of Enquiry into State Capture’s finding that directors of captured state-owned entities (SOEs) had not been properly held accountable. It called for an amendment of the Companies Act to extend the period in which an application for an order declaring a person delinquent can be brought “as it can take a number of years for the facts of delinquency to be uncovered”. The Companies Amendment Act amends the Companies Act of 2008 to extend the 24-month time bar to launch proceedings to 60 months – and gives the court the power to extend this period further where good cause is shown.

“Directors, along with other prescribed officers in companies, can be held accountable for a considerable period after they have committed the alleged offences,” notes Prof Natesan. “This is something that the IoDSA has long championed. We commend the extension of the timeframe but want to emphasise that this is not the whole answer.”

Belts and braces needed
The reality is that the cost and length of time it takes to bring an application of director delinquency to court deters companies from making use of this remedy. With no fast or easy means to address delinquency, directors who are guilty of gross misconduct are often simply removed from a board. However, without censure or statutory action, they continue to serve on other boards. So the misconduct, corruption and maladministration continue – and that is very costly for everyone.

In her presentation to the Parliamentary Portfolio Committee, she proffers a comprehensive solution: the establishment of a statutory professional body to which all directors would have to belong in order to have a license to practice.

Such a professional body would govern the office of directorship, guiding the profession and setting and maintaining standards for ethical and professional practice.

“As things now stand, the IoDSA is a voluntary professional body for directors and so its mandate to take disciplinary action is limited to its members,” says Professor Natesan. While every effort is made to advocate publically for good governance and directorship,  this is not enough to hold directors accountable.

By contrast, a statutory professional body would require all directors to become members in order to practice. The new body would ensure standards are upheld, that knowledge and skills are vetted and kept up to date and that directors abide by a code of conduct, failing which their license to practice could be removed.  Ultimately this would result in a quicker and less costly manner to hold directors accountable.

The IoDSA has established a Director Competency Framework, which identifies 15 technical knowledge and application competencies and 15 personal attributes and behaviour competencies needed to serve as a director. It has also developed two director designations—Chartered Director and Certified Director—both recognised by the South African Qualifications Authority, to enable directors to gain, prove and maintain the necessary competencies.

“The Zondo Commission’s findings show just how badly directorial misconduct affects a company, and how important it is to be able to hold rogue directors to account in terms of a rigorous, professional standard,” concludes Professor Natesan. 

“I believe it is time for South Africa – company stakeholders, owners, boards and professionals – to harness the momentum established by the Zondo Commission and the new Companies Amendment Act and take a stand to professionalise directorship.”

INFO BOX
What, exactly, is delinquency?
As the IoDSA’s guidance paper on director delinquency notes, delinquency arises when a director breaches his or her fiduciary duties towards the company being served. If material acts of misconduct can be proved, as listed in Section 162(5) of the Companies Act, the director can be declared delinquent by the High Court and precluded from continuing to act as a director for seven years or more. This statutory enforcement, which can be lifelong, is not intended to be a remedy for a trivial misdemeanour but rather for gross abuses of the fundamental trust inherent in the position of a director – i.e., unlawful conduct committed wilfully or recklessly. Probation orders, which can reach five years, can also be made by courts against directors for material breaches of the standard of conduct required of a director, either with intent or through gross negligence.

What is expected of a director?
Legal duties require directors to exercise their powers and perform their functions in good faith, for a proper purpose and in the best interest of the company and with the utmost degree of care, skill and diligence that may be reasonably expected of a person in the position of that director and from a person with the general knowledge and specific skills of that director. Section 76 of the Companies Act partially codifies these common law duties of directors and sets out the prescribed minimum standard of conduct for all directors and prescribed officers. It includes, amongst others, the prohibition of directors from using their position to gain personal advantages or to harm the company.
Links

• IoDSA Director Competency Framework
• IoDSA’s Guidance Paper on Director Delinquency

ENDS

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