The Companies and Intellectual Property Commission’s own initiative to apply for an order to declare a director delinquent.

In the matter of The Companies and Intellectual Property Commission v Creswell and Others [21092/2015] (hereinafter “Cresswell”) (Judgment 27 March 2017), the Companies and Intellectual Property commission (hereinafter “the CIPC”), brought its first ever successful application for an order to declare a director delinquent in terms of section 162 (3) of the Companies Act No. 71 of 2008 (hereinafter “the Act”).

It is worth mentioning that the Act vested a number of stakeholders of the company with locus standi to bring an application to declare a director delinquent in terms of section 162 (2), including shareholders, prescribed officers and directors. The CIPC is also vested with such locus standi, however in terms of section162 (3) of the Act. Since the Act came into effect, the first few applications to declare a director delinquent were always brought in terms of section 162 (2).

In Cresswell the three respondents, namely Mr. Steve Cresswell, Mr. Pierre Basson and Mr.Owen Wienand were directors of a company known as Skyport Ltd (hereinafter “Skyport”). The business affairs of Skyport attracted the attention of the CIPC as a result of published media articles and information on Skyport’s website regarding its plan to construct an international airport near Cape Town. The CIPC also learned that Skyport sold shares directly to the public for the purposes of raising capital to finance the project. Skyport claimed that it had applied for a license to operate an international airport from the Civil Aviation Authority (hereinafter “the CAA”). This claim was later denied by the CAA.

The CIPC was concerned with how Skyport was conducting its business and this was raised with the Minister of Trade and Industry, who instructed the CIPC to lodge an investigation into the business affairs of Skyport. Upon completion of the investigation the CIPC’s inspectors compiled a report which contained a number of adverse findings against Skyport and its directors. Among other things, the inspectors found the following: Skyport did not keep proper accounting books, the only source of income for the company was the proceeds of the sale of shares and such proceeds were used to pay directors’ remuneration, directors made unjustifiable personal withdrawals from Skyport’s accounts especially the Third Respondent, Skyport never generated money from its business, AGM’s were not held and the company was commercially insolvent.

The CIPC decided to lodge an application to declare Mr. Owen Wienand (hereinafter “the Third Respondent”), a delinquent director in terms of section 162 (3) read with (5) of the Act. The Third Responded who was the deponent to the answering affidavit had made a number of significant admissions which proved to be detrimental to his case. He admitted to most of the findings contained in the CIPC’s report.

However the Third Respondent raised a number of defences. He submitted that his conduct was not so serious that it can be described as demonstrating a conscious risk taking a, complete obtuseness of mind or a total failure to care and hence did not constitute gross misconduct sufficient to invoke section162 (5) (c) of the Act. He also argued that his section 22 right to choose his occupation or profession would be infringed if the order sought by the CIPC were to succeed, especially if the order were to apply in perpetuity.

The Court carefully considered its powers to declare a director delinquent under section162 (5) (c) (v) of the Act. The court observed that it is only required to make the declaration sought by the CIPC, if the director in question acted in a manner that amounted to gross negligence, willful misconduct or a breach of trust in relation to the performance of the directors’ functions and duties owed to the company.

With reference the matter of Msimang NO a.a v Katulina a.o 2013 (1) ALL SA 580 (GSJ) (hereinafter “Msimang”), the court considered the meaning of the concepts of “gross negligence” and “willful misconduct” as provided in section 162 (5) (c) (v). The court in Msimang noted that the concept of a delinquent director is new in our company law, however it recognized that the concepts of “gross negligence “ and “willful misconduct” are not novel. The court held further, that “although the concept of gross negligence fall short of dolus eventualis, it must involve a departure from the standard of a reasonable person to such an extent that it can be categorized as extreme”.

In seeking a clear authority on the meaning of the concept “willful misconduct”, the court further referred to the matter of Rustenburg Platinum Mines Ltd v South African Airways and another 1977 (1) Lloyds LR19 (Q.B (Com Ct), where it was held that willful misconduct goes beyond negligence or even gross negligence, in that the wrong doer knows and appreciate the wrongfulness of his conduct.

The court in Cresswell ultimately had to decide whether the CIPC adduced sufficient evidence on which it can decide whether the conducted of the Third Respondent warranted the punishment of being declared a delinquent director.

The court held that the approach should be to resist to consider the various averments in a singular fashion but rather consider holistically the alleged conduct and the performance of the director.

The court concluded that it is grossly negligent for a director to have allowed a company to continue business knowing that it is insolvent and that the CAA was not prepared to grant permission for the most important element of Skyport’s business, extract company cash in order to pay directors’ fees and also to allow the company to conduct business without keeping proper accounting systems.

The conduct of the Third Respondent was found to have amounted to more than just negligence. Thus the court declared him a delinquent director for a period of seven years in terms of section162 (5) (c) (iv) (aa) of the Act.

While the Cape Town High Court was delivering the Cresswell judgment on the 27th of March 2017, the CIPC also had another motion in the Johannesburg High Court for an order in terms of section162 (5) (c) (iv) (aa) of the Act, in the matter of Companies and Intellectual Property Commission v Moola and Others (44337/2012) [2017] ZAGPJHC 102 (30 March 2017).

In this matter the brief facts were as follows, the three respondent claimed that their father had resigned from a company known as CCE Motor Holding (Pty) Ltd and that they were appointed directors of the company. The father disputed this and approached the CIPC for help. The CIPC conducted its investigation and found that the respondents fogged the company’s resolution to have them appointed as directors. The court could not grant the order sought by the CIPC, because it found that the respondents were not factually and legally appointed as directors.

It is commendable when the CIPC also bring the application to declare a director delinquent, considering its investigative powers under the Act, this will certainly assist to deal with the issue of errant directors who disregard their fiduciary duties in common law and under the Act.

By Jeffrey Maluleke
jeffrey@dyason.co.za