© Institute of Directors in South Africa 2020

DIRECTOR MISCONDUCT General guidance note on how to approach director misconduct

20 March 2020

Guidance for Boards

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© Institute of Directors in South Africa 2020

Guidance for Boards: Director Misconduct

Technical and Other Contributors to this Guidance Note:

Vikeshni Vandayar (main author)

Fay Mukaddam (IoDSA Facilitator)

Asogaren Chetty (CIPC)

Tina Rabilall (CIPC)

Desmond Ramabulana (DTI)

Likani Lebani (Companies Tribunal)

Annamarie van der Merwe

Christelle Marais

Disclaimer

The information contained in this guidance note is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although every endeavour is made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. The view and opinions contained in this guidance note are merely guidelines for information purposes only, and as such no action should be taken without first obtaining appropriate professional advice. The IoDSA shall not be liable for any loss or damage whether direct, indirect, and consequential or otherwise which may be suffered, arising from any cause in connection with anything done or not done pursuant to the information presented herein. All copyright in this paper subsists with the IoDSA, and extracts of this paper may only be reproduced with acknowledgement to the Institute of Directors in South Africa.

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Contents

INTRODUCTION ............................................................................................................................................... 4

DEFINING DIRECTOR MISCONDUCT ............................................................................................................ 4

GENERAL STANDARD OF CONDUCT FOR A DIRECTOR ............................................................................ 8

MECHANISMS AND STRATEGIES AVAILABLE TO DETER DIRECTOR MISCONDUCT .......................... 10

ADDRESSING POSSIBLE DIRECTOR MISCONDUCT ................................................................................. 13

CONSEQUENCES OF DIRECTOR MISCONDUCT ....................................................................................... 20

ANNEXURE A – COMPANIES ACT SECTION 69 AND 70 SUMMARY ........................................................ 21

ANNEXURE B – REMOVING A DIRECTOR IN TERMS OF THE COMPANIES ACT ................................... 22

ANNEXURE C – COMPANIES TRIBUNAL PROCESSES ............................................................................. 23

ANNEXURE D – CIPC COMPLAINT PROCEDURE CoR135.1 FORM ......................................................... 25

ANNEXURE E – HOW TO ACCESS THE CIPC DISQUALIFIED DIRECTOR REGISTER ........................... 26

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Guidance for Boards: Director Misconduct

Introduction Highly publicised global and local corporate failures over a number of years have led to a significant

increase in calls to re-emphasise the important roles that companies play in the economy and the key

responsibilities of directors to ensure oversight of companies.

It is thus becoming increasingly important to understand how to deal with directors who do not fulfil their

duties in terms of the law and/or or who do not adhere to the standard of conduct expected of a director.

The purpose of this paper is to provide general guidance on what may constitute director misconduct

and the possible avenues available to report and/or address such misconduct.

Defining director misconduct Directors have fiduciary duties stemming from both the common law and the Companies Act No.71 of

2008 (“the Companies Act”). In addition, the King Reports on Corporate Governance for South Africa

(currently “King IV™”)1 set out the best corporate governance practices to which directors should aspire

and has been seen by the courts (in addition to the common and statutory law) as the benchmark of

best practice role and responsibilities expected of the board and its directors.

See the below section on General Standard of Conduct for more detail.

Determining whether an action or behaviour of a director is “misconduct” is not always black and white,

and if there is in fact misconduct the consequences will also depend on the type of director involved, the

severity and impact of the misconduct, and the specific circumstances of the case. Not all misconduct

will amount to or mean that the director should be declared delinquent. For the purposes of this paper,

misconduct will be broken up into the following two categories and our main focus of this paper will be

on category 2:

1 The King IV Report on Corporate Governance for South Africa 2016, copyright and trademarks are owned by the Institute

of Directors in Southern Africa, available via http://www.iodsa.co.za/?page=AboutKingIV

Category 1

Misconduct in terms of performance as a

director (for e.g. not attending meetings, not

being involved in discussions, not being

prepared for meetings etc.)

Category 2

Misconduct in terms of a gross breach of a

director’s fiduciary duties or standard of conduct

expected (e.g. not acting in the best interests of

the company)

Not malicious, not for personal gain and/or does

not break a law/rule/duty and does not have a

significant negative impact on the company the

director serves.

(See outcomes where Category 1 is mentioned)

Clear breach of a standard of conduct, law, duty

or rule and/or where the action/behaviour

(whether positive or negative) causes gross

negative impact or failure of the company the

director serves.

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Guidance for Boards: Director Misconduct

The Companies Act sets out under sections 69, 70, 71, 76, 77 and 162 various examples of misconduct

and disqualification that would warrant removal as a director from the board and/or declaration as a

delinquent director, as well as that which would attract criminal or civil liability. It should be noted that

any action or behaviour of a director that contravenes any legislation would attract possible criminal or

civil liability for that individual director and possibly the other directors on the board (depending on the

circumstances). Section 77 of the Companies Act covers instances where director(s) may be held liable

and specifically provides under subsection (7) that board members can be held jointly and severally

liable for the same act (for e.g. failure to vote against a decision that would contravene the Act).

Any action by a director that is in breach of his/her role, responsibilities, function, duties or the standard of conduct expected of that director, whether stipulated in terms of legislation, common law or board and/or company policies, would be considered as misconduct. Whether or not the action was wilful, intentional or unintentional will merely affect the degree of sanction required for such misconduct in the specific circumstances.

“

Some examples of director misconduct include, among others:

Disclosing confidential information (including information relating to boardroom discussions) without

authorisation.

Acting or speaking on behalf of the company without appropriate authorisation.

Failing to disclose conflict of interests and acting upon such conflict.

Competing with the business of the company.

Taking any action which would be a breach of a fiduciary duty.

Violating a law.

Failing to abide by the rules of the company and board policies (such as code of conduct and ethics).

Engaging in disruptive or inappropriate behaviour in the boardroom or in interactions with management and

employees.

Unduly interfering with the operations of the business.

Extracted and adapted from “The challenge of director misconduct” by Holly J Gregory, October 2013 on www.practicallaw.com

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What is expected from directors and how misconduct will be identified

and/or treated, is often linked to the culture of the board and of the

company. The board together with the shareholders and the company

should be clear on what is expected (or what will not be tolerated) from

its directors. This may differ from board to board, however, it is the

board’s duty to ensure that policies, systems and processes are in place

to ensure adherence to applicable laws and best practices and prevent

the board as a whole to become dysfunctional.

See IoDSA Corporate Governance Paper on Governing bodies' role in preserving the broad moral

landscape

Often the standard of conduct expected of directors when appointed to a board is not written and/or

expressly referred to in the appointment letter/agreement, board charter or any other document to which

the board can hold the director accountable. Whilst it is recommended to clearly set out the standard

that a board/company may expect from a director in one of the board documents, irrespective of whether

it is written down or not the director can still be held criminally or civilly liable for his actions as s/he will

be expected to be acquainted with the statutory requirements and the common law standard of conduct

will still apply. The courts and often any disciplinary hearing process will look to the “reasonable man

test” to consider what a reasonable director in these circumstances would have done and what one would

expect a reasonable director to know (i.e. should you have known based on your position, experience,

or qualification?). A director can thus not use ”I did not know” as a defence, if it would be reasonably

expected of someone serving as director to be aware of his/her (1) director fiduciary duties, (2) role and

responsibilities in terms of King IV and (3) standard of conduct expected in the company rules, code of

conduct, board charter etc.

The Companies Act does not differentiate between non-executive and executive directors, thus both

types of directors will be subject to the Companies Act ambit in relation to removal and declaration of

delinquency for misconduct in capacity as a director on the board. However, with regards to executive

directors, removal from the board may not automatically mean removal as an employee of the

organisation and thus applicable labour laws, contract law and disciplinary rules and requirements will

also need to be considered and applied. If, however, an employee who holds an ex-officio director

position leaves the employ of the organisation or is removed from office, he/she will automatically cease

to be a director on the board and will be replaced by the employee taking that ex-officio position.

Executive director misconduct is often easier to manage or deal with due to the internal employee/labour

relationship and processes.

TIP: The Board should set clearly defined expectations for director behaviour and communicate such standards to directors.

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Guidance for Boards: Director Misconduct

At all times, directors should consider whether their actions (irrespective of whether taken in their

personal capacity or not) will bring the company into disrepute. An individual director’s actions (even

when performed in his/her personal capacity or not as a company representative) can often be easily

linked to the company. The defence that actions were taken in one’s personal capacity has become (with

the rise of social media) less of a viable defence. The bridge between personal and representative

actions has become blurred and thus individuals should tread carefully when posting on social media.

Before reporting an allegation of director misconduct

Allegations of director misconduct can have serious ramifications for the individual concerned. Not only can they be removed or prevented from acting as a director in future, but it also affects the individual’s reputation.

Allegations of misconduct should therefore not be taken lightly and should be dealt with in an independent and confidential manner, until such time as an investigation and determination has been reached.

It is important to ensure that the correct facts as well as evidentiary support (where possible) to corroborate an allegation is available, before an allegation of misconduct is made on a whim, perception or mere suspicion.

“

TIP: Social media training and awareness for directors is thus important, due to the

impact that posts on social media through personal accounts can have on the

reputation of the company and the individual him/herself.

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General standard of conduct for a

director

The Companies Act sets out:

the statutory standard of conduct to which directors should adhere;

director duties and liabilities; and

actions that can be taken against a director who is either found to be negligent or who has

contravened his/her director duties and/or functions as set out in the Companies Act.

In terms of Section 76 of the Companies Act, the codified standard of conduct expected of a director is

that he/she must –

(a) not use the position of director, or any information obtained while acting in the capacity of a director, to

gain advantage for the director, or for another person other than the company or a wholly-owned

subsidiary of the company; or to knowingly cause harm to the company or a subsidiary of the company;

(b) communicate to the board at the earliest practicable opportunity any information that comes to the

director’s attention, unless the director reasonably believes that the information is either immaterial to the

company or generally available to the public or known to the other directors; or is bound not to disclose

that information by a legal or ethical obligation of confidentiality; and

See further Section 75 of the Companies Act on a director’s duty to disclose personal financial

interest and the IoDSA King IV Practice Note: Declaration of interests and Corporate

Governance paper on Conflict of Interests.

(c) subject to subsections (4) and (5), a director (when acting in that capacity) must exercise the powers and

perform the functions of director –

i. in good faith and for a proper purpose;

ii. in the best interests of the company; and

iii. with the degree of care, skill and diligence that may reasonably be expected of a person carrying

out the same functions in relation to the company as those carried out by that director; and having

the general knowledge, skill and experience of that director.

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See the IoDSA General Guidance Note on Director Duties for further detailed information.

The King IV Report in its totality sets out the roles and responsibilities of the board and is often used by

the courts as the benchmark against what is reasonably expected of a competent director. Ethical

leadership is characterised by integrity, competence, responsibility, accountability, fairness and

transparency2. The IoDSA Director Competency Framework further sets out the key competencies

expected of a director.

A company can in addition to the above also have specific additional or higher standards expected of its

directors, which may be driven by additional legislative/regulatory requirements (such as in the banking,

insurance or public sectors etc.) or company/industry specific needs.

2 See King IV Report, Principle 1

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Guidance for Boards: Director Misconduct

Mechanisms and strategies available

to deter director misconduct The following (amongst others) are ways in which a company can ensure that its board of directors (and

other stakeholders) are aware of, and can easily identify the standard of conduct expected from its

directors as well as the complaints, investigation and disciplinary procedures to be fol lowed for alleged

director misconduct in the company:

1. The Board Charter (not a public document) and/or MOI (public document) should clearly set out –

the roles and responsibilities of the board of directors;

any additional grounds applicable for a person to be disqualified from acting as director on this board;

investigative and/or disciplinary procedures to deal with a breach of such standard (unless in a

separate policy or in the appointment agreement); and

minimum qualifications required for a person to serve as a director.

2. A Board Member Code of Conduct should be in place setting out –

the ethical values of the company;

the conduct and behaviour expected of all the directors (i.e. both executive3 and non-executive

directors4) serving on the board; and

how any breach of such code will be dealt with by the board.

3 An executive director is a director that is involved in the day to day business of the company by virtue of his/her

employment by the company, and usually serves on the board of directors in an ex officio capacity i.e. is a board member by virtue of the position held in the company such as CEO or CFO. Not all executive directors of a company serve on the board of directors. Their relationship with the company is governed through their employment contract.

4 A non-executive director is a director that is not involved in the day to day business of the company and serves on the

board of directors as either a representative director of one of the shareholders or as an independent director. A non-executive director’s relationship with the board/company is governed by his/her appointment letter/agreement. Non-executive directors are appointed and elected by the shareholders.

This document can be publicly available so that stakeholders can hold directors accountable against such Code of Conduct.

Note: It is thus recommended that the Board Member Code of Conduct be a separate document to the Board Charter, should a company not want to make its charter publically available.

“

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3. Executive Director Employment Contracts and Non-Executive Director (“NED”) Agreements or

Letters of Appointment –

should place an obligation on directors to comply with the Board Member Code of Conduct and/or

other statutory, best practice or company policies with regards to standard of conduct expected;

should include investigative and/or disciplinary procedures to deal with a breach of such standard

(unless in the board charter or separate policy which is then referred to here); and

should set out any specific rules applicable to directors in respect of misconduct procedures such as

for example with regards to suspension.

For guidance on drafting NED Agreements refer to the IoDSA General Guidance Note on NED

Agreements or Appointment Letters. Executive Directors will be governed by their employment

contracts with the company.

4. Specific company policies and procedures to deal with allegations of director misconduct (such as the

process for lodging complaints and/or allegations, how to handle complaints, and the investigative and

disciplinary hearing (if applicable) process.

For guidance on how to draft an appropriate disciplinary procedure consider The Disciplinary

Procedure for Misconduct published by Labour Guide, which is accessible via

http://www.labourguide.co.za/discipline-dismissal/765-workplace-discipline-and-dismissal.

Whilst this procedure is intended for internal purposes (i.e. employees) it can still be used as

useful guidance for drafting the disciplinary procedure for directors.

5. A fraud hotline and/or appropriate whistleblowing policies and/or procedures should be created

(where applicable and necessary) for lodging complaints.

Executive vs Non-Executive Director treatment

Executive directors are covered by the company’s internal code of conduct and policies and procedures for complaints as they are employees of the company and bound by such employee contracts. Non-executive directors on the other hand will not be subject to these internal policies and procedures unless specified as such, and thus it is important to ensure that NED agreements include compliance with the Board Member Code of Conduct and/or internal company codes and policies that cover how to deal with director misconduct and the complaints and disciplinary process (if not in the Board Member Code of Conduct). Prescribed officers (i.e. non-board members) serving on committees of the board should be aware of section 76 of the Companies Act which places the same standards of conduct and liability on such individuals as if they were directors. In this regard, prescribed officers are in a similar position as executive directors, who are also treated as employees.

“

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6. Adequate training (and induction programmes) should be provided to directors (especially if new on

the board) on their roles, responsibilities and duties etc. so as to raise awareness of the conduct/behaviour

expected.

7. Mentorships for new directors and/or directors that need guidance can help provide the director with both

guidance and a sounding board from an experienced director.

Refer to the IoDSA Corporate Governance paper on Mentorship for governing body members for further information.

8. Performance evaluations of the board and individual directors can also assist with identifying areas

that require attention, training and/ or awareness and thus can potentially prevent future misconduct.

Refer to the IoDSA Guidance for Boards: Board Performance Evaluations and Individual Direct Peer Review papers for further information. See also Section 162(10) of the Companies Act which provides alternative or additional rulings/remedies that the courts can impose when declaring a director delinquent. These additional actions could also be implemented internally where the misconduct was not severe or warranted the director to be declared delinquent.

Essentially the board should ensure pro-active engagement with directors to ensure that they are aware of the standards expected of them, what would be considered misconduct as well as the consequences of misconduct. This engagement must take place continuously through the Chair and with the active support of the company secretary.

“

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Addressing possible director

misconduct Once director misconduct is suspected/confirmed the following

options are available:

Option 1: Raise the allegation with the board, company

or shareholders for investigation and/or a resolution to

remove the director from the board

Verify whether board and/or internal company policies or procedures are in place which cover the

process for lodging an allegation of misconduct against a director of the company and follow the

process as outlined. This would apply to both internal and external complainants.

In the event no such policies or procedures exist –

complaints and/or allegations of misconduct (together with all supporting evidentiary

documentation) should be raised with the Chair of the board, company secretary and/or other

company representative that may be indicated by the company; or

if the Chair’s behaviour is in question, the lead independent director (“LID”), the deputy Chair,

the Chair of the Social and Ethics Committee or the Chair of the Audit Committee (if no LID

has been appointed) should be informed of the matter for investigation; or

raise the allegation with the relevant shareholder of the company for investigation.

Refer to Principle 7 in the King IV Report and King IV Practice Note: The role of the chair and lead

independent for further information.

See Section 69 (6), (7) and (8) for instances where a director would be ineligible or disqualified to act

as a director (whether at the time of nomination and election or whilst serving as a director). See

Annexure A for a summary of Section 69 and 70.

In all instances, the requirements of the Companies Act and/or other specific legislation governing the

company (such as the PFMA or MFMA), which may provide for specific statutory procedures must be

considered and addressed when misconduct is suspected.

The Chair of the Board and the company secretary, upon receipt of an allegation of director misconduct

should conduct an investigation with the support of any external legal and/or forensic expertise that

The most appropriate

approach to handling

director misconduct will

depend on the nature and

degree of misconduct in

question.

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Guidance for Boards: Director Misconduct

they deem necessary. The director concerned should be informed of the allegation and the

investigation to be undertaken, in order to prepare a response.

It is recommended that directors should not be suspended without due care to ensure that the process

is fair, transparent and impartial, unless the alleged misconduct is a serious offence which warrants

suspension or if it is believed that the specific individual would interfere with the investigation of the

alleged misconduct. In addition, reputational risk that may affect the board and the company should

be considered carefully by the board before taking any steps to suspend the director in question.

It is important to note that in terms of Section 69(4) of the Companies Act, in the event that the board

has made a determination that a director is disqualified or ineligible to act as director (due to

misconduct) and such director has taken the board’s determination to court for review in terms of

section 71(5), then during the time of the review, the director shall be suspended from office. Since

the matter in essence is not closed during such a time, the vacancy on the board does not become

available until the court has made a judgement on the application for review.

All allegations of misconduct should be properly investigated by the board before any decision is made in respect of the director accused of misconduct. Failure by the board to properly address an incident of director misconduct can have significant consequences for the board and the company, such as creating the perception that such inappropriate behaviour is acceptable and therefore can continue and/or breaking the trust between board members. If uncertainty exists or if other directors are not all in agreement, the board should consider acquiring professional legal advice.

“

OUTCOMES

Possible outcomes after investigation of an allegation and where a director has been found to be

negligent or not performing in terms of his/her duties or functions.:

- director is given a warning and/or training to correct the behaviour (Category 1 Misconduct).

- director is not nominated for re-election when his/her term comes to an end (Category 1 Misconduct).

- director is removed from the board either by ordinary resolution by

the shareholders at a general meeting or by board resolution where

there is more than two directors on the board, in terms of Section

71 of Companies Act. (See Annexure B)

Note: In addition, look at

the company’s MOI for

further authority that may

be provided to the board

with regards to removal of

directors under certain

circumstances.

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Option 2: Lay a complaint with the professional body which has authority over the

director

If the director is a member of a professional body, and the misconduct in question amounts to a breach

of the professional body’s code of conduct for members, then a complaint regarding the specific breach

should be lodged with that professional body. For example:

IoDSA – Complaints against IoDSA members, who have breached the IoDSA Member Code of

Conduct, can be raised via the member complaint process found via the following link.

South African Institute of Chartered Accountants (“SAICA”) – The disciplinary and complaints

process against persons who are subject to SAICA’s professional authority can be found on the

SAICA website via the following link.

South African Institute of Professional Accountants (“SAIPA”) – Complaints against a SAIPA

member should follow the specified complaints process as outlined on the SAIPA website via

the following link.

Chartered Secretaries Southern Africa (“CSSA”) – The CSSA’s disciplinary process against its

members can be found in the Member Handbook accessible via the following link.

Legal Practice Council (“LPC”) – Complaints against legal practitioners are dealt with by

provincial offices of the LPC, depending on where the legal practitioner is practising. Further

information on the LPC’s code of conduct and complaints contact details visit the LPC website

via the following link.

The Anti-Intimidation and Ethical Practices Forum (AEPF) – The AEPF was created to

assist professionals in certain fields who are being intimidated for exposing corruption in

the workplace. The AEPF provides advice to potential whistle-blowers in the governance,

accounting, auditing, business, risk management and related fields on how to blow the

whistle safely, responsibly and effectively. View the AEPF case review/complaint lodging

process via the following link

OUTCOMES

Although this step in itself will not address the misconduct in question, it is an additional

deterrent to director misconduct and ensures that professional bodies hold their members

accountable to the standards of good governance, as well as due care and skill towards

the companies that they serve.

Possible outcomes if found guilty by the professional body:

- Revoke the individual’s membership with the professional body; and/or

- Revoke a designation held by the individual.

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Option 3: Submit an application to the Companies Tribunal for removal of a director

The Companies Tribunal (“Tribunal”) is mandated by Section 71(8) of the Companies Act to adjudicate

on applications to remove a director from office. Companies with less than three directors may apply

to the Tribunal for the removal of a director by completing the form CTR 142. See Annexure C for the

Tribunal’s application process for such removal.

For list of decisions and cases held by the Companies Tribunal around director disputes see

https://www.companiestribunal.org.za/decisions-orders/directorship-disputes/

Option 4: Report the misconduct to the Companies and Intellectual Property

Commission (“CIPC”) for investigation5

Any person may file a complaint to the CIPC using CoR135.1 Form (attached as Annexure D) alleging that:

a person has acted inconsistently with the Companies Act; or

a person’s rights under the Companies Act, Memorandum of Incorporation (MOI) or company rules

have been infringed.

The completed CoR Form should be sent to the following e-mail address: CoR135.1complaints@cipc.co.za,

together with documentation substantiating the allegations. If the allegations do not constitute grounds for a

remedy under the Companies Act, it will not be investigated.

Upon receiving a complaint, the CIPC may inter alia resolve:

not to investigate if it appears to be frivolous, vexatious or does not allege any facts that

would constitute grounds for remedy under the Companies Act;

to refer it, if more practicable, for resolution by mediation, conciliation or arbitration to the

Companies Tribunal or an accredited entity or any other person; or

to direct an investigator or inspector to investigate.

A complaint may also be initiated directly by the CIPC on its own accord or on the request of another

regulatory authority. In addition, the Minister of Trade and Industry may direct the CIPC to investigate

an alleged contravention of the Companies Act or other specified circumstances. Upon receiving

5 See Part D of Chapter 7 of the Companies Act 71 of 2008

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instruction from the Minister, it is compulsory for the CIPC to investigate the matter and is not subject

to any discretion.

Option 5: Take legal action to declare a director delinquent (s162 of Companies Act)

If the director’s alleged misconduct falls within the circumstances provided under Section 162(5), (7) and

(8) and thus warrants legal action in order to remove the director from the board in the best interests of

the company – “a company, a shareholder, director, company secretary or prescribed officer of a

company, a registered trade union that represents employees of the company or another representative

of the employees of a company”6, “the Companies and Intellectual Property Commission or Takeover

Regulation Panel”7, and “any organ of state responsible for the administration of any legislation”8 may

apply to a court for an order declaring a director of that company delinquent or under probation. It should

be noted that Section 162 further provides a window period of 24 months to bring an application to

declare an individual as delinquent or on probation based on their actions whilst they were a director

6 See section 162(2), (5)(a) – (c), (7)(a) and (8) of the Companies Act. 7 See section 162(3), (5), (7) and (8) of the Companies Act. 8 See section 163(4) and (5)(d) – (f) of the Companies Act.

OUTCOMES

Depending on the independent investigator’s report and recommendations the CIPC may

undertake to do one of the following actions, among other things listed in section 170:

- excuse any person as a respondent in the complaint, if the Commission or Panel

considers it reasonable to do so, having regard to the person’s conduct, and the degree

to which the person has cooperated with the Commission or Panel in the investigation;

- issue a notice of non-referral to the complainant, with a statement advising the

complainant of any rights they may have under the Act to seek a remedy in court;

- in the case of the Commission, propose that the complainant and any affected person

meet with the Commission or with the Companies Tribunal, with a view to resolving the

matter by consent order;

- commence proceedings in a court in the name of the complainant, if the complainant-

o has a right in terms of the Act to apply to a court in respect of that matter; and

o has consented to the Commission or Panel, as the case may be, doing so;

- refer the matter to the National Prosecuting Authority, or other regulatory authority

concerned, if the Commission or Panel, as the case may be, alleges that a person has

committed an offence in terms of the Act or any other legislation.

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from the date such individual ceases to be a director of that company. This provides relief to ho ld

individuals accountable and/or to prevent them from acting as a director for other companies in the future.

Professional legal advice and representation will be needed for this cause of action

In terms of Section 162(5) of the Companies Act (as set out below), a court must make an order declaring

a person to be a delinquent director if the person is found guilty of the following:

Declaration of

delinquency is

unconditional

and subsists

for lifetime

(s162(6)(a))

Declaration of

delinquency

may be subject

to conditions

and subsists for

7 years from

date of order

or longer

period as

determined by

the court

(s162(6(b))

A Company,

shareholder,

director, Co Sec,

Trade Union or

other employee

representative may

apply to a court for

an order under (a)-

(c) (s162(2))

CIPC or

Takeover

Panel can

apply to court

for an order

any of these

circumstances

Any organ of

state may

apply to court

for an order

under (d) –(f)

(s162(4))

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In terms of Section 167(7) a court may place a director on probation if the following conditions are found:

If the director is found to be delinquent, it will result in the director being automatically removed from the

board due to being disqualified from acting as a director in terms of Section 69 of the Companies Act

(see further Section 66(5) and (6) for more detail).

A distinction should be made between directors disqualified under Section 69(8)(a) and Section 69(8)(b),

with reference to section 70 and 71(3). Directors disqualified under Section 69(8)(a) (i.e. by court order)

automatically lose their office, whilst directors disqualified under Section 69(8)(b) do not since it’s a

decision resolved by the Board and thus the director needs an opportunity to dispute the decision. (See

Annexure A for a summary of Section 69 and 70.)

Court will

make such a

declaration

only under the

circumstances

in s162(8)(b)

Court will

make such a

declaration

only under the

circumstances

in s162(8)(a)

Declaration

of probation

may be

subject to

conditions

and subsists

not more

than 5 years

(unless

extended)

(s162(9))

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Guidance for Boards: Director Misconduct

Directors declared delinquent are registered as such on the CIPC records9. The CIPC allows

registered customers (registering a profile on the CIPC is free) to search companies and individuals.

In order to look up an individual’s directorship history and/or whether he/she has been declared a

delinquent director you need the individual’s RSA ID number or passport number

See Annexure E for step by step guide on how to access the Disqualified Director Register via the

CIPC eServices function (accessible via https://eservices.cipc.co.za/Login.aspx )

Section 69(3) of the Companies Act provides that a company cannot knowingly permit an ineligible or

disqualified person to serve as a director. A search on the disqualifed director register as well as criminal

and reference checks must be part of the nominations process before an individual is appointed on the

board.

Consequences of director misconduct

Depending on the severity of the misconduct and whether or not the misconduct was intentional, the

misconduct could attract (as indicated above under each of the options available for possible actions):

a) Warnings or educational actions to improve performance (where behaviour is corrective).

b) Not being put up for re-election when term expires.

c) Removal as a director from the board if found to be ineligible or disqualified (section 66, 69, 70

and 71 of Companies Act)

d) Declared delinquent or placed under probation (section 162 of the Companies Act)

e) Civil or criminal liability (section 77, 213, 214, 216 and 218 of Companies Act)

f) The court may also add additional conditions to a declaration of delinquency or probation

(section 162(10)).

9 See section 162(11) to (13)

Refer to the IoDSA Corporate Governance paper on Director due diligence for further information on

what to look for before appointing a director and/or a director taking up a board position.

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Guidance for Boards: Director Misconduct

Annexure A

COMPANIES ACT SECTION 69 and 70 SUMMARY WHO CANNOT SERVER AS A DIRECTOR

In terms of Section 69 of the Companies Act, an individual is “ineligible or disqualified” to be appointed, elected or act as a director if he/she:

`

Probation

s69(5)

is a person placed under probation in terms of s162, except to the extent permitted by the order of probation

Ineligible

s69(7)

Disqualified

s69(8)

a. Is a juristic person b. Is an unemancipated

minor or is under a similar legal disability

c. Does not satisfy any qualification set out in the MOI

S69(8)(a) Court has prohibited the person to be director OR declared the person delinquent in terms of s162

S69(8)(b) i. is an unrehabilitated insolvent

ii. is prohibited in terms of any public regulation to be a director of the company

iii. has been removed from an office of trust, on the grounds of misconduct involving dishonesty

iv. has been convicted and imprisoned without the option of a fine or fined more than the prescribed amount for theft, fraud, forgery, perjury or an offence: • involving fraud, misrepresentation or

dishonesty • in connection with the promotion,

formation or management of a company, or in connection with any act contemplated in subsection (2) or (5)

• under this Act, the Insolvency Act, the Close Corporation Act, the Competition Act, the Financial Intelligence Centre Act, the Securities Services Act or Chapter 2 of the Prevention and Combating of Corruption Activities Act.

Section 70 Immediately cease to be a director if…:

a) becomes incapacitated to the extent that the person

is unable to perform the functions of a director, and

is unlikely to regain that capacity within a reasonable

time, subject to s71(3);

b) Declared delinquent or placed under probation

(s162)

c) becomes ineligible or disqualified (s69, subject to

s71(3));

d) is removed by resolution or court order (s71)

*See below for more detail

Cannot appoint a person who is

ineligible or disqualified (s69(1))

If a director becomes ineligible or

disqualified whilst serving as a

director he/she Immediately ceases

to be entitled to act as director,

subject to s70(2) (s69(4))

S70(2) read with s71(3) and (8)

Other than instances where a person

is prohibited or declared delinquent

by a Court (i.e. s69(8)(a)), if a board

or the Companies Tribunal resolves

to remove a director the vacancy on

the board only arises after the expiry

of 20 business days (the time

allowed for an application for review

to be submitted) or the court order

in terms of such application for

review.

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Guidance for Boards: Director Misconduct

Annexure B

REMOVING A DIRECTOR IN TERMS OF THE COMPANIES ACT Shareholders

ordinary resolution

Board

resolution

Declare the director

delinquent via court

application

Companies

Tribunal

Section 71

IF there are more

than 2 directors on

the Board

IF there are fewer

than 2 directors

on the Board

Section 162

The board, other

than the director

concerned, must

determine the

matter by

resolution, and may

remove a

director whom it

has determined to

be ineligible or

disqualified,

incapacitated, or

negligent or

derelict in

performance of

his/her functions as

a director, as

the case may be.

Any shareholder

or director of the

company may

make an

application to the

Companies

Tribunal.

Under all 3 circumstances the director in question must be notified of

the meeting/hearing, be given the proposed resolution and any

information around the allegation so that he/she can prepare a

response, and must be given a reasonable opportunity to prepare and

present his/her response before the resolution is put a vote.

Only in terms of a Board and Companies Tribunal decision:

The director has 20 business days to apply to a court to review the determination made by the board or

companies tribunal. During this time, the director is suspended and a vacancy on the board only arises upon

expiry of the 20 days or when the court has made an order on the application.

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Guidance for Boards: Director Misconduct

Annexure C

COMPANIES TRIBUNAL PROCESSES

1. Application to deal with Director Misconduct

Filing Procedure10

After filing an application with the Tribunal, the Applicant must serve the Respondent within five business days

and provide proof of service to the Tribunal. If the Respondent wishes to oppose the application, he or she

must within twenty business days after being served, serve a copy of an answer to the Applicant and file the

answer with proof of service with the Tribunal.

After receiving an answer from the Respondent, the Applicant may reply within fifteen business days; such

response must be in an affidavit format in terms of Regulation 144. The Applicant must serve the replying

affidavit on the Respondent and file proof of service with the Tribunal.

Upon completion of the exchange of documents, the Tribunal will set the matter down for hearing and inform

parties about the date, time and place of hearing using form CTR 151.

Grounds11 on which a director can be removed include:

(i) Ineligibility12

Ineligibility means being incapable of running an office. A person is ineligible to be a director of a company if

the person is:

(a) a juristic person (that is, not a natural person);

(b) an unemancipated minor or under a similar legal disability; or

(c) does not satisfy any specific qualification set out in the company’s memorandum of incorporation.

(ii) Disqualification13

Disqualification may occur due to one of the following reasons:

10 Regulation 142

11 Section 71(3)

12 Section 69(7)

13 Section 69(8)

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Guidance for Boards: Director Misconduct

(a) A competent court has prohibited the person to be a director or declared the person to be delinquent.

(b) the person –

is an unrehabilitated insolvent;

is prohibited in terms of any public regulation to be a director of the company; and/or

has been removed from an office of trust, on the grounds of misconduct involving dishonesty; or

has been convicted, in the republic or elsewhere, and imprisoned without option of a fine, or fined

more than the prescribed amount, for theft, fraud, forgery, perjury or an offence.

(iii) Incapacitation

Incapacitation refers to the extent that the director is unable to perform the functions of a director and is unlikely

to regain that capacity within a reasonable time; or a person is deemed to be incapacitated if that person

cannot perform their usual functions or duties due to a mental or physical disability.

(iv) Neglect or derelict

Neglect or dereliction in the performance of director’s duties refers to any director who does not act –

(a) in good faith and for a proper purpose;

(b) in the best interests of the company; and

(c) with the degree of care, skill and diligence that may reasonably be expected of such a person.

A party who is not satisfied with the decision of the Tribunal may approach the High Court within twenty

business days to review the Tribunal’s decision. The court may uphold, confirm or set aside the decision of the

Tribunal.

2. Alternative Dispute Resolution

The Tribunal also has a mandate to resolve company disputes through Alternative Dispute Resolution

(“ADR”). Applications for ADR are made in terms of form CTR 132.1. In a case where a company has three

or more directors, the shareholder or directors may instead of invoking the provisions of Subsection 71(3),

apply for an ADR through Section 166 of the Act. The referral for the resolution in terms of this section may be

by mediation, conciliation or arbitration. Section 167(1)(a) and (b) state that if the Tribunal succeeds in assisting

parties in dispute resolution, the Tribunal may record the resolution as an order; if parties to the dispute consent

to the order, such an order can be made an order of court14.

Currently this process is voluntary.

14 Section 167(3) states that a consent order confirmed by a court may include an award of damages and does not preclude a person applying for an award of civil damages, unless the consent order includes an award of damages to that person.

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Guidance for Boards: Director Misconduct

Annexure D

CIPC COMPLAINT PROCEDURE – CoR135.1 FORM

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Guidance for Boards: Director Misconduct

Annexure E

How to access the CIPC Disqualified Director Register (DDR)

Step 1: Create a CIPC Customer Account Website:

Click on Customer Registration link found on the left hand column (see red arrow and circled area below)

Step 2: Login in Click on the Customer Login link found on the left hand column and login into your customer account using

the login details created under Step 1.

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© Institute of Directors in South Africa 2020

Guidance for Boards: Director Misconduct

Step 3: Option 1: Click Transaction and select DDR

Option 2: On front page – from drop down list select ID

Step 4: Enter individual’s RSA ID number of Passport number Results of search will then be displayed.

Option 2

Option 1

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© Institute of Directors in South Africa 2020

Guidance for Boards: Director Misconduct

Notes

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© Institute of Directors in South Africa 2020

Guidance for Boards: Director Misconduct

Notes

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© Institute of Directors in South Africa 2020

Guidance for Boards: Director Misconduct

Notes

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© Institute of Directors in South Africa 2020

Guidance for Boards: Director Misconduct

Notes

© Institute of Directors in South Africa 2020

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