South Africa: The Delinquent Director: No Tolerance For Errant Directors

Last Updated: 11 February 2013
Article by Eric Levenstein

Errant company directors who fail to comply with the obligations set out in the Companies Act, 2008, will now face the prospect of being declared "delinquent" under certain circumstances.

Earlier this year the South Gauteng High Court declared a director to be delinquent for failing to discharge his duties and further granted leave to the companies involved to claim damages from such director for losses incurred as a result of such director's conduct.

As a consequence, South African directors must take cognisance of the impact of Section 162 of the Act (declaration of delinquent directors) and further take steps to ensure that they do not open themselves up to the possibility of being declared delinquent.

Section 162

In terms of Section 162 of the new South African Companies Act 2008 ("the Act"), a company, a shareholder, a director, company secretary or prescribed officer of the company, a registered trade union that represents employees of the company, or any other representative of the employees of the company, may apply to court for an order declaring a person (i.e. a director) delinquent or under probation if:

  1. the person is a director of that company, or within 24 months immediately preceding the application, was a director of that company; and
  2. such director has:
  1. consented to serve as a director whilst ineligible or disqualified under the Act or whilst under a probation order in terms of the Act or the Close Corporations Act and acted in a manner that contravened that order;
  2. grossly abused the position of a director;
  3. intentionally, or by gross negligence, inflicted harm upon the company or a subsidiary of the company, contrary to the provisions of the Act;
  4. acted in any manner that amounts to gross negligence, wilful misconduct or breach of trust in relation to the performance of such director's duties.

Furthermore, the Act provides that a director who uses his or her position or any information obtained while acting in the capacity of a director to:

  • gain an advantage for him- or herself or for another person other than the company or a wholly owned subsidiary of the company; or
  • knowingly cause harm to the company or a subsidiary of the company, may be declared delinquent.

Any organ of state responsible for the administration of any legislation may also apply to court for an order declaring a director delinquent if such director has repeatedly been personally subjected to a compliance notice or similar enforcement mechanism for substantially
similar conduct in terms of any legislation.

A court will be obligated to declare a person to be a delinquent director if the person consented to serve as a director while ineligible or was disqualified. Such disqualifications are set out in Section 69 of the Act and include that such person:

  • was an unrehabilitated insolvent; or
  • is prohibited in terms of any public regulation to be a director; 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 for theft, fraud, forgery or any conduct involving fraud, misrepresentation or dishonesty or offences involving various Statutes such as the Insolvency Act, the Close Corporation Act, the Competition Act, the Financial Intelligence Centre Act (FICA), the Securities Services Act, or the Prevention and Combating of Corrupt Activities Act.

Any person who has at least twice been personally convicted of an offence or subjected to an administrative fine or similar penalty in terms of any legislation could also be subject to an application for a declaration of delinquency.

Any declaration of delinquency will subsist for the lifetime of the person declared delinquent on account of having consented to serve as a director whilst ineligible or disqualified under the Act or whilst under a probation order in terms of the Act or the Close Corporations Act and acted in a manner that contravened that order.

Any declaration made by the court may be made subject to any conditions that the court considers appropriate, including conditions limiting the application of declaration to one or more particular categories of companies.

Furthermore, a court may make an order placing a person under probation. This would occur under circumstances where the court is satisfied that the declaration is justified having regard to the circumstances of the company's conduct and the person's conduct in relation to the management, business or property of the company at the time. Such order for probation (similar to a suspended sentence) will be made subject to conditions that the court considers appropriate and may subsist for a period not exceeding five years.

It is important to note that an order for probation applies to directors who were present at meetings of companies and failed to vote against a resolution despite the inability of the company to satisfy the solvency and liquidity test as set out in the Act. The solvency and liquidity test would apply to directors and any person who is obligated to consider whether, having regard to the reasonably foreseeable financial circumstances of the company at a particular point in time, that the assets of the company as fairly valued, equal or exceed the
liabilities of the company.

Furthermore any person may be placed under probation if he or she:

  • acts in a manner materially inconsistent with the duties of a director; or
  • acts in or supports a decision of a company to act in a manner which results in oppressive or prejudicial conduct; or
  • on some basis acted in a manner which constituted an abuse of the separate juristic personality of such company.

The court may further make an order, placing a person under probation if, at any period of ten years after the effective date of the Act, the person has been a director of more than one company (irrespective whether concurrently, sequentially or at unrelated times) and during that time that the person was a director of each of such companies, two or more of those companies each failed to fully pay all of its creditors or meet all of its obligations, except in terms of a Business Rescue plan as contemplated by the Act or a compromise with creditors in terms of Section 155 of the Act.

Without limiting the powers of the court, a court may order as conditions applicable or ancillary to a declaration of delinquency or probation that the person concerned:

  • undertakes a designated program of remedial education relevant to the nature of the person's conduct as director;
  • carries out a designated programme of community service; or
  • pays compensation to any person adversely affected by the person's conduct as a director to the extent that such a victim does not otherwise have a legal basis to claim compensation.

If a person is placed under probation he or she is to be supervised by a mentor in any future participation as a director while the order remains in force or be limited to serving as a director of a private company or of a company of which that person is the sole shareholder.

Any person who has been declared delinquent or subject to an order of probation may apply to court to suspend the order of delinquency and substitute an order of probation, with or without conditions, at any time more than three years after the order of delinquency was made or to set aside an order of delinquency at any time more than two years after it was suspended or an order of probation at any time after such order was made. This will not be available to a person declared delinquent on account of having consented to serve as a director whilst ineligible or disqualified under the Act or whilst under probation order in terms of the Act or the Close Corporations Act and acted in a manner that contravened that order.

Case law

In the case of Kukama vs Lobelo, Peolwane Properties (Proprietary) Limited, Diphuka Construction (Proprietary) Limited and CIPC, South Gauteng High Court, Johannesburg, 12 April 2012, the Presiding Judge ruled that the director concerned had contravened section 22 (reckless trading) and section 76 (standards of directors conduct) of the Act.

The director in question had, inter alia, allowed funds (some R2.2 million) destined for the company to be paid into an alternative account to the detriment of the company, had failed to detect a fraud on SARS in the sum of R39 million and had further failed to alert his co-director and co-shareholder of such fraudulent transactions.

The court held that the conduct of such director did "not measure up to the standard required and expected of a director" and as a result found that he was in breach of his fiduciary duties to the company. Further, section 76(2)(b) of the Act created a duty on the part of a director to communicate at "the earliest practicable opportunity any information that comes to his attention to the board", which he failed to do.

The court held that the director's conduct was grossly negligent, constituted wilful misconduct, a breach of trust and a gross abuse of his position as a director. As a result, the court ruled that the director should be declared delinquent in terms of section 162 of the Act. The court did not order the director's removal, as such would occur automatically as a result of such declaration. The court further granted leave to the company that had suffered damages as a result of the director's conduct, to institute legal proceedings for such losses against the director personally.

Lessons learned?

There is no doubt that directors of companies will have to carefully consider the manner in which they conduct the affairs of companies, particularly where there is the possibility of being declared delinquent. Directors who find themselves on the receiving end of such an order are highly unlikely to be nominated (never mind actually appointed) to any other boards of companies.

Furthermore, the word "delinquency" carries criminal connotations. The various dictionary definitions refer to "offender", "guilty of a crime or misdeed", "failing in one's duties" or "failing to perform an obligation", the most telling and damning being "a person guilty of serious antisocial or criminal conduct". In the initial draft of the Act, it was proposed that a "register of delinquent directors" be available to the general public. This appears to have fallen away.

Directors will need to understand whether or not they are complying with the provisions of the Act. In particular, a director is obligated to ensure that he or she is not trading his or her company in a position of financial distress which might push the company into a situation where it becomes insolvent and unable to pay its

Clearly these provisions significantly increase the expected level of directors' duties to companies
in South Africa and the standard of conduct required. Coupled with the provisions of King III, directors need to consider whether they are adhering to their duties carefully, or face an order of delinquency with all of its negative and unfortunate consequences.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.