Article courtesy of Law Dot News | Corporate | Company Law – Director Delinquency

Director Delinquency Declarations: Managing Your Risk

“Knowledge is power.” (Sir Francis Bacon)

Being a company director carries not only rewards but also risks that you need to manage carefully.

In particular, you are held by the Companies Act to a high standard of conduct. Breaching any of your many duties and responsibilities can have significant negative consequences. Among these is being declared a “delinquent director”. That’s no small thing…

It’s a serious long term career risk

Serious categories of misconduct expose directors to being declared delinquent and thus disqualified from holding any directorship or senior management position for a period ranging from 7 years to a lifetime.

A wide range of less serious categories of misconduct can lead to “probation” orders, with possible consequences including disqualification for up to 5 years, supervision by a mentor, remedial education, community service, and payment of compensation.

The other side of the coin, of course, is that the delinquency risk isn’t just a warning to directors. It also gives victims of director misconduct a powerful remedy.

Let’s illustrate in the context of two recent cases.

Seven years in the wilderness (and a R78m damages bill) for a delinquent MD

Two groups of granite producing companies, one responsible for quarrying and the other for production and export, operated inter-dependently for decades. All went well until the Managing Director of the quarrying group of companies placed them into business rescue. Unsurprisingly, this had a devastating effect on both groups, with mining rights in jeopardy, credit lines and bank facilities lost, production levels affected, discussions with SARS over penalties terminated, and millions wasted both in the business rescue process and in remedying the aftermath.

The companies in the surviving group of companies sued the MD of the quarrying group with allegations that those companies should not have been placed into business rescue at all, and for various other acts of mismanagement and misconduct.

The MD’s defences to these claims found no favour with the Court, which declared him delinquent and ordered him to pay R78m in damages. He had, the Court held, unnecessarily placed companies into business rescue without engaging shareholders and despite available shareholder support and the absence of true financial distress. He had acted with gross negligence, caused substantial financial damage, breached his fiduciary duties (i.e. used his powers improperly and not in the best interests of the companies), and neglected his supervisory duties relating to quarry operations.

Another director, another disqualification

Now let’s move to a struggle between two shareholder factions for control of an investment company with energy sector interests. Exasperated, one faction went to the High Court to challenge the validity of a board resolution and share issue which affected their control of the company. There was substantial value at stake here, possibly (reading between the lines of the judgment) many millions of US dollars.

The dispute eventually found its way to the SCA (Supreme Court of Appeal), where, on application by the opposing shareholder faction, a director (and sometime Executive Chairperson) of the investment company was declared delinquent for seven years.

He had, found the Court, acted with gross negligence, wilful misconduct and breach of trust in performing his functions. Here’s one example among many: even after his removal as Chairperson, he purported to call a shareholder meeting “By order of the Chairman.” That alone, said the Court, was “a blithe disrespect for corporate governance and [a breach of] his fiduciary duty as a director.”

If you’re a director, here’s how to manage your risk

Your best defence against hostile stakeholders will always be to remain fully aware of all your many fiduciary duties, and to scrupulously comply with them. Knowledge is power!

Act early to address any financial issues that could lead to accusations of reckless trading or of causing financial harm to the company. Ensure that proper financial and operational controls and procedures are in place. At all times act strictly in the best interests of your company with transparency and good faith, proactively exercise proper oversight of all operations, and – perhaps most importantly – ask us for advice if in any doubt!

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.

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Setting up to go into business can be a very exciting time for an entrepreneur as it holds all the promise of a bright future. Much of this excitement is deciding on the name of your business and one which you hope will be elevated to the heights of such other famous and well-known brands we have all come to love. Part of this exciting journey is probably the process of setting up and registering your new company. Included in this process is the registration of your company name.

It does sometimes happen that eager entrepreneurs register a company name that is identical or confusingly similar to someone else’s name or their brand name (what we lawyers would call a “trade mark”). This unwitting mistake could land you in hot water, so care must be taken before rushing to register your company name. If you don’t, you may have spent a lot of money on marketing and brand establishment that may all be for nothing when you receive a cease and desist letter from the lawyer of a trade mark owner or a notice from the Commission telling you to abandon or change your name.

As a general rule, you may not register a name for a company where such a name belongs to another company or is a trademark or a well-known trademark of another unless you have such trademark owner’s authority to do so. You may also not register a name for your company that is confusingly similar to the name of another company or its trademark and, also, register a name where the words, expression or a mark is protected by other legislation such as the Merchandise Act.

The Companies Act provides that any interested party may apply to the Tribunal for a registered company name to be removed or amended on the register where such name does not comply with the provisions of the Companies Act such as the cases discussed above.

Upon consideration of such an application and upon a finding that the registered name is objectionable in that it does not comply with the Companies Act, the Tribunal may make an administrative order directing the Commission to amend the name, remove it from the register or call on you to apply for the registration of a new name.

The troubles for you may not, however, end at this point. If the wrongful use of the name violates another person’s registered or well-known trade mark, it remains open for such trade mark owner to also bring trade mark infringement proceedings against you and this may, in turn, result in a potential claim against you by the trade mark owner.

This article is not aimed to dampen the entrepreneurial spirt but to encourage you to seek professional assistance from your lawyer to reduce the risk of someone launching an application of a name objection against you when, ideally, you should rather be spending time making your name a great and powerful brand.

Good luck!

Disclaimer to this article: This article is published for you to read and, if you so wish, share with others on the understanding that at all times the copyright herein will and is the sole and exclusive ownership of the author. The article is made available for informational purposes only and does not in any way constitute legal advice. No representations as to the accuracy, completeness, suitability or validity of this article is made. No liability will attract to the author for any losses, injury or damage you may suffer arising out of your use of this article. It is recommended to always seek professional assistance of a qualified lawyer at all material times.