Delinquency and fiduciary duties; SCA reaffirms that an order of delinquency must follow where the conduct justifies a finding that the director acted in a manner that amounted to gross negligence, wilful misconduct and a breach of trust

Section 162 of the Companies Act 71 of 2008 (“Companies Act”) entrenches the right of a company, director, shareholder, company secretary, or prescribed officer to approach a court for an order declaring a director delinquent. Importantly, section 162(5) provides that once the statutory grounds are established, the court has no discretion—it must declare the director delinquent.

In its recent decision of Msibithi Investments and Others v African Legend Investment and Others, the SCA considered what conduct justifies such a declaration under section 162(5)(c)(iv). That provision applies where a director has “acted in a manner that amounted to gross negligence, wilful misconduct or breach of trust in relation to the director’s functions within, and duties to, the company.”

Dealing with a complex corporate governance dispute, the SCA held that:

• Trivial or technical breaches will not suffice. The misconduct must amount to gross negligence, wilful misconduct, or a breach of trust in relation to the director’s performance of their functions and duties.
• Deliberate misconduct constitutes a breach of fiduciary duty. Conduct such as deliberate misrepresentation of information, intentional frustration of binding obligations, or wilful defiance of proper corporate governance processes amounts to a breach the fiduciary duties owed by a director.
• An order of delinquency must follow. If the breach of such fiduciary duties justifies a finding that the director acted in a manner amounting to gross negligence, wilful misconduct, or breach of trust, the has not discretion but to grant an ordering the director delinquent under section 162(5)(c)(iv).

The SCA’s decision underscores the dual purpose of section 162: it serves both as a deterrent to errant directors and as a remedy available to aggrieved companies, shareholders, and officers. The judgment reaffirms the centrality of fiduciary duties and the severe consequences that follow from an egregious breach thereof. Grounds for delinquency may arise where, for example:

• A director deliberately misrepresents information to the board;
• A director breaches binding undertakings or obligations imposed directly on the director or on the company to which the director owes fiduciary duties; or
• A director deliberately disregards or defies corporate governance processes and collective board decisions.

The case stands as a clear reminder that South African courts will not hesitate to declare a director delinquent where the evidence establishes serious misconduct or abuse of fiduciary trust