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Reporting prejudicial conduct of directors and presiding officers

24 June 2022 Gillan & Veldhuizen Inc

Wayward company directors who fail to comply with the obligations set out in Section 163 of the Companies Act can now be declared “delinquent” under certain circumstances.

Provisions within the Act allow for affected persons or prejudiced parties to report prejudicial conduct, abuse or mismanagement of directors and presiding officers who fail to act with due consideration for the company’s financial viability or existence.

The Companies Act acts as a yardstick to establish whether a director, related person or presiding officer has conducted themselves contrary to the established practices that may be expected of them by virtue of their office or relationship with the company. “Prejudicial conduct is essentially a scenario where a person placed under a fiduciary duty towards a company deviates from the standards of expected practice and fair play required to be exercised in their official capacity,” explains Charles De Meillon, candidate attorney at commercial law firm Gillan & Veldhuizen Inc.

He adds that Section 163 of the Companies Act is one such addition that affords specific protection to a shareholder or director of a company who, upon application to the court, can show/prove prejudicial conduct. For example:

a) The company or a related person has performed an act or omission that is, oppressive or unfairly prejudicial that has the effect of disregarding the interests of the Applicant;
b) Further to point a), where the business affairs of the company or a related person have been conducted in a similarly callous or malicious manner, or
c) Where a director or presiding officer has acted/exercised their powers in an unfairly prejudicial or oppressive manner that disregards the interests of the Applicant.

With any commercial/corporate application the courts are cautious to pry into the affairs of the respective juristic entities without due regard to the impact that such a decision or order would have on the internal structure and continued operations, alternatively, existence of the entity once granted.

Accordingly, the courts are given a wide array of remedies to impose upon a defaulting director or presiding officer should the Application prove to be successful. These include granting an interim or final order that the court deems appropriate extending amongst other things to:

a) Granting an interdict,
b) Compelling the appointment of a liquidator or the initiation of insolvency or business rescue proceedings,
c) Compelling the amendment of a company’s memorandum of incorporation,
d) Appointing or removing a director as well as changing their status or ability to hold office as such,
e) Compelling the issuing of shares, or
f) The rectification of company records and ledgers.

With the delicate and complex nature of these disputes in mind, seeking legal advice is imperative and, in some instances, may be construed as a duty - given that provisions of the Act allow a director of a company to make use of and rely upon the advice of experts to guide themselves when managing the affairs of a company.

Accordingly, should you become involved in such a dispute or wish to ensure that you and your company is compliant with these statutory duties, consulting with legal experts who specialise in company law, corporate governance and dispute resolution, can guide you through the many regulations in place and counteract any potential threats that may be present.

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