Director disqualification - New Companies Act and Competition Act

The business environment has experienced some major legislative changes over the past few years. Most notably, the enactment (and confusion relating to the enactment) of the Companies Act, and the passing of the Competition Amendment Act, which will come into effect on a date still to be proclaimed by the President.

The relationship between these two pieces of legislation is not obvious yet and may thus not be fully appreciated at this stage, however, directors and management of companies should be awake to the reality that once the Amendment Act is enacted a contravention of section 4(1)(b) of the Competition Act, (ie the anti-collusion provisions) could lead not only to a hefty fine being levied against the company and the criminal prosecution of those directors and management employees involved, in or aware of, the cartel behaviour, but also to their disqualification from holding office in terms of the Companies Act.

In this article we examine this interplay between the relevant provisions of the Companies Act and the Competition Amendment Act and the circumstances where a contravention of the Competition Act could lead to director disqualifications as a result of a firm's cartel behaviour under the Companies Act.

Director's liability in terms of the competition Amendment act, 1 0f 2009

Section 4(1)(b) of the Competition Act contains an outright prohibition on firms engaging in conduct that amounts to price fixing, market division or collusive tendering. These prohibited forms of conduct are widely considered to be the most egregious of competition law offences and under the Competition Act firms which are found to be guilty of engaging in per se prohibited conduct face the risk of being liable for administrative penalties of up to 10% of their annual turnover for first time contraventions of section 4(1)(b).

The Competition Amendment Act, in recognition of the gravity of these offences creates a statutory offence in terms of which directors and management of contravening firms can be prosecuted for their personal involvement in collusive conduct. By the planned insertion of section 73A into the Competition Act, the Amendment Act extends the range of offences for which individuals can be prosecuted in terms of the Competition Act, placing directors and managers at risk of incurring personal liability for the collusive conduct of their firms in certain instances.

In terms of section 73A it will be an offence to cause or knowingly acquiesce to a firm engaging in a prohibited practice in terms of section 4(1)(b) of the Competition Act. Knowingly acquiesce means "having acquiesced while having actual knowledge of the relevant conduct by the firm". The prosecution of individuals under this section hinges on the firm in question entering into a consent order with the Competition Commission in which it admits a contravention or on the Competition Tribunal or Competition Appeal Court making a finding that the firm has contravened section 4(1)(b) of the Competition Act.

It is interesting to note that this provision may be capable of being challenged constitutionally, as it may lead to an infringement on an accused person's right to a fair trial in terms of section 35 of the Constitution, in particular an accused person’s rights to be deemed innocent until proven guilty. This is due to the fact that the Competition Tribunal's finding of a contravention by a firm of the Competition Act (for which a lower standard of proof is required when compared to criminal proceedings) could serve as rebuttable proof in subsequent criminal proceedings that a director of that firm is guilty of a contravention of section 73A and, also, the fact that such rebuttable proof places a reverse onus on the accused director to prove his/her innocence.

Director disqualification in terms of the NEW companies act

Section 69 of the Companies Act does not fundamentally change the content of the director disqualification provisions contained in section 218 of the Companies Act, 61 of 1973, however, a more formulaic approach is adopted in setting out the disqualification grounds and procedural matters relating to director disqualification.

Section 69 of the Companies Act provides, inter alia, that a person will be disqualified to act as a director where that person has "been convicted, in the Republic or elsewhere, and imprisoned without the option of a fine, or fined more than the prescribed amount…in connection with the promotion, formation and management of a company…"

The prescribed amount referred to in the Companies Act is currently set at R1000.00. In terms of section 74 of the Competition Act, a person successfully prosecuted under section 73A of the Competition Act after the Amendment Act comes into force, will be liable for a fine not exceeding R500 000.00 and/or imprisonment for a period not exceeding 10 years.

Successful prosecutions under section 73A of the Competition Act are thus in many cases likely to meet the prosecutorial disqualification requirements set out in the Companies Act. Insofar as the substantive nature of such prosecutions are concerned, there can be little doubt that they relate to the management of a company (that of the contravening firm in this case).

The effect of a contravention of the Competition Amendment Act, 1 of 2009

In those instances where directors (For purposes of section 69, the Companies Act uses the term 'director' to refer to directors, prescribed officers and members of board and audit committees collectively) or employees with management authority (i) caused a firm to engage; or (ii) knowingly acquiesced in the firm engaging in cartel conduct in contravention of section 4(1)(b) of the Competition Act, careful consideration must be given to the basis on which settlement proceedings and negotiations are entered into with the Competition Commission.

Similarly, admissions regarding cartel behaviour in complaint proceedings before the Competition Tribunal must be approached with caution, as in both instances admissions of guilt could lead to not only the criminal prosecution but also the disqualification of key company employees or officers from serving as a directors, prescribed officers or members of the board or audit committee of a firm.

This consideration is especially important considering that it is common practice to admit a contravention of the Competition Act as the Competition Commission considers such an admission as cooperative behaviour by a respondent and the Competition Tribunal accepts this as a factor (in terms of section 59(3)(f) of the Competition Act) when determining the administrative penalty that will be imposed on the firm for contravention of the Competition Act.

Once the Competition Amendment Act comes into force, practitioners and companies alike will, therefore, have to be cognisant of the fine balancing act that will be required when dealing with complaint referrals relating to conduct in alleged contravention of section 4(1)(b) of the Competition Act. The collective impact of section 73A of the Competition Act (once the Amendment Act comes into force) and section 69 of the Companies Act, may cause companies to be reluctant to engage willingly with the Competition Commission, in terms of the Commission's Corporate Leniency Policy, as the decision makers in firms in possible contravention of the anti-collusion provisions of the Competition Act may be reluctant to seek leniency on behalf of their firms in the knowledge that any admission of a contravention of section 4(1)(b) of the Competition Act could lead to their own criminal prosecution and disqualification from holding office.