The Johannesburg High Court in South Africa just lately declared a dishonest director of a non-profit firm delinquent. This case reveals how necessary it’s for non-profit firms to be very cautious about who they appoint to their board.
The delinquency treatment is offered underneath the nation’s Companies Act to directors and different stakeholders to maintain directors accountable. The idea of a court docket declaring a director delinquent is a big innovation of the Companies Act. This treatment was launched when South Africa’s company legislation regime was reviewed about ten years in the past.
It is designed to preserve excessive company requirements and to protect stakeholders and the investing public towards director misconduct.
The delinquency treatment has been used increasingly by stakeholders over the previous 10 years and has attracted an awesome deal of litigation and publicity in South Africa.
For instance, in a case that dominated information headlines for a number of months and concerned vitriolic public assaults, the previous CEO of Old Mutual Peter Moyo utilized to court docket to declare your entire Old Mutual board delinquent for blocking him from returning to the corporate because the CEO. His utility was not profitable.
Read: High court docket guidelines in favour of Old Mutual board in Moyo matter
A delinquency order bans an individual from being a director for no less than seven years. But a court docket can lengthen this era and even lengthen it to the director’s lifetime.
For instance, within the case between Organisation Undoing Tax Abuse v Myeni the court docket declared Dudu Myeni, a former director and chairperson of South African Airways, a delinquent director for life. It discovered that she had induced substantial hurt to the airline and had knowingly taken it to the brink of catastrophe. And had grossly abused her place.
Read:
SAA’s ex-chair Dudu Myeni banned from directorships (May 2020)
Dudu Myeni the recalcitrant witness (May 2021)
The Zondo Report on SAA, SAAT and SA Express (Jan 2022)
For a court docket to declare directors delinquent, they should be responsible of critical misconduct. For instance, they have to grossly abuse their place, take private benefit of info or a possibility, hurt the corporate deliberately, or be responsible of gross negligence, wilful misconduct, or breach of belief. Poor decision-making or bizarre industrial misjudgment isn’t sufficient for a delinquency order.
Australia and the UK additionally enable stakeholders to apply to court docket to disqualify directors. But in my research I discovered that South Africa’s delinquency treatment is way stricter.
For instance, a much wider group of stakeholders can apply to court docket declare directors delinquent.
Courts in Australia and the UK have a alternative whether or not or not to disqualify directors from holding workplace. South African courts do not need this alternative and should declare directors delinquent in the event that they breach any of the delinquency grounds.
Non-profit firms
The Companies Act has particular guidelines for non-profit firms. Non-profit firms are fashioned for a public profit object or an object relating to a cultural or social exercise, or a communal or group curiosity.
The legislation requires non-profit firms to use all their belongings and revenue to additional the corporate’s goals. They might not distribute their revenue and property to the directors, besides in restricted circumstances.
For instance, directors might get cheap remuneration for providers they render to the corporate. They can also get reimbursed for cash they spend to additional the corporate’s goals.
A non-profit firm might be fashioned with or with out members, nevertheless it will need to have no less than three directors. If it has members, they’ll select the directors. If there are no members, the board or different individuals select the directors on the premise set out within the firm’s structure.
Non-profit firms normally depend on funding from donors or on grants. These donations cowl their operational bills and assist the corporate to obtain its goals. Non-profit firms can get a partial revenue tax exemption and an exemption on donations tax.
Dishonest directors of non-profit firms
A director of Breadline Africa RSA NPC, Farzeen Bhana, was just lately declared delinquent by the court. The firm varieties half of a global public profit organisation known as Breadlines Africa. It is concerned in lots of initiatives, together with giving funding and sensible help to handle situations of poverty.
Bhana gave in a falsified CV throughout her interview for a place to the board of the corporate. She claimed to have levels from the University of the Witwatersrand and the London School of Economics, and different postgraduate {qualifications}. None of this was true. She additionally submitted a false reference at her interview.
Bhana went to worldwide board conferences of the corporate whereas she was a director. There she made false displays concerning the work she was doing to additional the corporate’s goals. She additionally tried to defraud the corporate.
One of the corporate’s directors utilized to court docket to have Bhana declared delinquent. If a non-profit firm has members, a member can carry the delinquency utility. If there are no members, many different stakeholders, together with a director, the corporate secretary, the Companies and Intellectual Property Commission and even an individual performing within the public interest can carry the applying.
Approving of analysis I performed on the potential abuse of the delinquency remedy, the court docket agreed that as a result of a variety of individuals can apply to court docket to declare a director delinquent, it is vital to ensure that frivolous and vexatious functions are not lodged. It is very necessary to guard towards the abuse of the delinquency treatment in a non-profit firm as a result of the applying can hurt the corporate’s status and thus its potential to entice funding.
The court docket held that the director bringing the delinquency utility towards Bhana was not motivated by malice. It mentioned that her utility was additionally not frivolous or vexatious.
The court docket mentioned that Bhana breached her fiduciary duty in a critical manner. It dominated that her conduct amounted to wilful misconduct and breach of belief. It additionally held that her actions in making an attempt to profit herself personally confirmed that she grossly abused the place of director.
The court docket didn’t state how lengthy its delinquency declaration will final. Presumably it is going to be for the minimal interval of seven years.
Even although Bhana didn’t trigger financial hurt to the corporate, the court docket mentioned that the reputational hurt and threat was immense.
Lessons to be learnt
This case reveals that if directors of non-profit firms are dishonest, courts won’t hesitate to declare them delinquent. As the court docket mentioned, the integrity of non-profit firms is their company to be certain that funds are donated in order that they’ll fulfil their goals.
Dishonest directors of non-profit firms might severely hurt the corporate’s status domestically and internationally. This can hamper its potential to entice funding. It may also hamper its potential to meet its goals and serve the general public good.
Boards of directors of non-profit firms should be vigilant about who they appoint as directors. They should take steps to correctly display potential directors earlier than they appoint them.
Rehana Cassim, Professor in Company Law, University of South Africa
This article is republished from The Conversation underneath a Creative Commons license. Read the original article.
