In terms of section 162 of the Companies Act, various stakeholders of a company may apply to court for a delinquency order against an individual who serves or served as a director within the 24 months preceding the application. This remedy serves both to protect the public who may be dealing with companies run by people not suited to directorship, and to promote standards of corporate governance.
If the director’s conduct factually falls within the parameters of section 162, the court has no discretion: it must make an order declaring the person to be a delinquent director. It is no defence for the director to argue that the conduct complained of was not sufficiently egregious to justify a delinquency order. Section 162 contemplates only serious misconduct; if a director’s conduct falls under the section, it is by definition sufficiently serious to demand a delinquency order.
This was illustrated in the recent judgment of the Supreme Court of Appeal (SCA) in Smuts v Kromelboog Conservation Services and Another[1]. Mr Smuts,a conservationist, through his non-profit charitable Landmark trust, had conceived the Shepherding Back Biodiversity Project to reintroduce traditional herding or human shepherding as a conservation initiative in semi-arid rangeland livestock agricultural areas. The project would need long-term tenure on appropriate agricultural land for its effectiveness to be demonstrated. Mr Allsop, through his Tamarisk Trust, acquired land in Beaufort West and leased it to Kromelboog – a company wholly owned by Tamarisk but with Smuts as its sole director – for the required period to enable Smuts and Landmark to run the project on it. Tamarisk, Landmark and Kromelboog concluded a management agreement appointing Landmark as the property manager, with its expenses refunded by Kromelboog.
The project not yielding the envisaged results after five years (where Smuts originally envisaged needing 25 years), Allsop summarily terminated the arrangement and instructed Smuts and Landmark to vacate the Beaufort West land, which of course was a repudiation on their part of the deal that was struck. Various disputes and litigation streams ensued as a result. Notified of Tamarisk’s intention to remove him as a director of Kromelboog, Smuts took various unilateral steps to protect his and Landmark’s position, including clearing Kromelboog’s funds from its bank account and sequestering them in Landmark’s account; rendering invoices to Kromelboog for his personal benefit while Kromelboog was in a state of insolvency; causing legal fees to be paid by Kromelboog for personal litigation (including taking advice on his impending removal as a director); causing Kromelboog to pay Landmark a donation without its shareholder’s approval; and trying to usurp Kromelboog’s business on behalf of his newly formed entity. This was the conduct forming the basis of the delinquency application. Smuts, in an obviously conflicted position, and while purporting to safeguard the rights of both Landmark and Kromelboog in relation to the pending disputes, conducted himself in a way that was clearly contrary to Kromelboog’s interests.
Smuts’ position before the court was that because of the far-reaching and potentially disastrous consequences of a delinquency finding, conduct must be “sufficiently egregious” to justify a delinquency order. Smuts then provided explanations or justifications for why his conduct was not wrongful or sufficiently egregious to warrant a declaration of delinquency. For example, his emptying of Kromelboog’s bank account was explained away on the basis that he was “ringfencing” the money to facilitate an accounting for all income and expenses until the conflict was resolved, and since he was bona fide in this approach – at least so it was argued – his conduct did not rise to the requisite level of egregiousness. The SCA gave this argument short shrift: Smuts clearly removed the money from a conflicted position (his entity Landmark being party to the dispute with Kromelboog) and his doing so was contrary to Kromelboog’s interests. Smuts’ contention that as Kromelboog’s director he was really protecting its interests by preventing it from incurring liability in relation to a pending dispute, fell flat when he himself was the other party to the dispute. The SCA emphasised that a director’s position is one of trust, and the fact that Smuts found himself in a predicament of entangled interests was no excuse: his fiduciary duties were owed solely to Kromelboog for the purposes of the delinquency enquiry. The section 162 conduct having been established, the SCA thus had no discretion but to uphold the finding of delinquency in relation to each header of conduct complained of.
This judgment serves as yet another cautionary tale to directors: there are no degrees of egregiousness. A director’s conduct either falls within section 162 or it does not. If it does, and a delinquency order is applied for, it must be granted. A court cannot and will not soften or withhold the sanction based on alleged mitigating circumstances.
This article was penned by partner, Pierre Burger.
[1] (511/2023) 2024 ZASCA 156 (14 November 2024)