In previous issues, we have spoken about the increased liabilities placed on directors by the new Companies Act (the Act). The Act is a balancing piece of legislation and allows increased directors’ powers compared to the 1973 Companies Act. With this increased power there comes an increase in responsibility and a consequent increase in liabilities for directors.One of the increased liability provisions is section 162 of the Act – the “delinquency” provision.The effect of this section is that directors may be barred for life from being a director (this includes holding a senior management position with “general executive control” in the company) or for up to seven years or, in the case of a lesser offence, placed on “probation” for a period of time. The director may also face civil claims and potential criminal liability. Section 162 states that a director may be declared delinquent, or placed on probation, if that person is a director or was a director within 2 years of the application to a court. The delinquency danger, and grounds for declaration.Actions that warrant being declared delinquent include:
- Acting as a director when disqualified by the Act or by the Close Corporations Act
- Grossly abusing the position of a director
- Acting in a grossly negligent manner or with intent to harm the company (this includes a subsidiary of the company)
- Acting in a manner which shows “wilful misconduct” or a “breach of trust”
- The Act also provides that a director may be declared delinquent if he/she (or “another person” – presumably likely to be someone known to the director) “gains an advantage” from knowledge obtained as a director rather than the company or a subsidiary benefitting from this knowledge.
Who can apply to the Court to declare a director delinquent?
A fellow director, senior employee, registered trade union or any other body representing employees may apply to the court to declare a director delinquent or on probation. In addition, if a director repeatedly ignores a compliance notice, a “state organ” may also apply under section 162.
Clearly, this should concentrate the minds of directors. More than ever before, you need not only to act in a prudent manner, but also to be able to show that you have exercised your mind in relation to any decision you make or participate in making.
The negative aspect of such sections of the Act is they tend to scare away non-executive directors who are very important in checking on the actions of executive directors. Unfortunately, the Act does not differentiate the liabilities of executive and non-executive director. In a country where skills are short, this is a disappointing consequence of the Act.
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