There is a distinction that is drawn between someone who is ineligible to be director of a company and someone who is disqualified from being a director of a company. If a person is ineligible, that person is prohibited completely from being a director. However, a person who has been disqualified may still be permitted to be a director if the court sanctions such appointment.
The grounds of ineligibility and disqualification are set out in section 69 of the Companies Act1 ("the Act"). It is important to note that the section does not only apply to directors but it also applies to alternate directors, prescribed officers and members of the board committees whether such persons are members of the board of directors or not2. A prescribed officer can be defined as any person who exercises general executive control over and management of the whole, or a significant portion, of the business and activities of the company, or regularly participates to a material degree in the exercise of general executive control over and management of the whole, or a significant portion, of the business and activities of the company3.
Given the wide reach of the definition of prescribed officer, a number of persons may fall within this definition and such people may include the Chief Executive Officer, Company Secretary and Chief Operations Officer. The title given to a person is irrelevant when determining whether a person is a prescribed officer or not4.
Unless the company's Memorandum of Incorporation ("MOI") provides otherwise, there are no minimum requirements or qualifications that are prescribed in the Act5. This approach that was adopted by the drafters of the Act has to be commended because it would have been dangerous to prescribe such minimum requirements given the fact that companies vary in size and complexity. This is properly something that must be regulated internally by each company.
However, Section 69(7) lists certain categories of persons who are expressly ineligible to be company directors and these are:
- juristic persons (like companies and close corporations or a trust6), therefore only natural persons can be directors of a company;
- minors who have not been granted majority status;
- persons suffering from some legal disability, like being declared by a court incapable of managing their own affairs;
- a person who does not satisfy such minimum requirements set out in the MOI (if the company's MOI has such requirements); and
- a person disqualified in terms of any other additional grounds of ineligibility as may be set out in the company's MOI.
On the other hand, a person may be disqualified from being a director in any one of the following instances7:
- where a person has been prohibited by a court or any other public regulation from becoming a director;
- where a person has been declared delinquent by a court in terms of section 162 of the Act;
- if a person is an unrehabilitated insolvent;
- if a person who has been removed from an office of trust on grounds of misconduct involving dishonesty;
- if a person has been convicted and imprisoned without an option of a fine, or has been fined more than the prescribed amount8 for theft, fraud, forgery, perjury or other offences specified in section 69(8)(b)(iv) of the Act9.
In addition to the grounds set out in the Act, the company's MOI may provide additional grounds and a director may also be disqualified if the conditions set out in the MOI are met.
For example, the MOI may provide that a director will be disqualified if they fail to attend a certain number of board meetings.
If a person has been disqualified or is ineligible to be a director such a person cannot be validly appointed as a director of the company and should such a person have been occupying the position already at the time that they become ineligible or disqualified, they can no longer continue to act as a director.
As stated above, with regards to disqualification on the basis of insolvency or criminal conviction, section 69(11) of the Act grants a court a discretion to exempt a person from such disqualification. If a person was disqualified on the aforesaid grounds (insolvency and criminal conviction) the disqualification will last a period of 5 years, unless the court directs otherwise.
It is important that, before a person is appointed to the board of directors of a company or appointed as a prescribed officer or member of a board committee, proper background checks must be done to ensure that no ineligible or disqualified persons are appointed to these positions. Even when the person is already acting as a director, should that person be disqualified or become ineligible, they can no longer act in their capacity as director of the company.
1 Act 71 of 2008 (as amended)
2 Section 69(1) of the Act
3 Section 1 of the Act, read with Regulation 38(1) of the Act
4 Regulation 38(2)
5 Section 69(6)(b)
6 Section 1 extends the definition of a 'juristic person" to include a trust
7 Section 69(8)
8 Currently R1 000 in terms of Regulation 39(4)
9 These include offences involving fraud, misrepresentation or dishonesty; offences relating to promotion, formation or management of a company; and offences under the Act, the Insolvency Act (No 24 of 1936), Close Corporations Act (No 69 of 1984), Competition Act (No 89 of 1998), Financial Intelligence Act (No 38 of 2001), Securities Services Act (No 36 of 2004) or Chapter 2 of the Prevention and Combating of Corrupt Activities Act (No 12 of 2004)
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.