Directors Serve the Best Interests of the Company – The Importance of Directors' Duties

Monthly Feature Article by Nicolene Schoeman – Louw

Introduction

As a business owner or entrepreneur, understanding the legal landscape is crucial for the success and sustainability of your business. One of the key areas to be aware of is the legal duties of directors. The recent Supreme Court of Appeal case,?Smuts v Kromelboog Conservation Services (Pty) Ltd and Another, provides valuable insights into the responsibilities and potential pitfalls for company directors.

Facts of the Case

In this case, Dr. Boudewyn Homburg De Vries Smuts, a nature conservationist, was appointed as the sole director of Kromelboog Conservation Services (Pty) Ltd (Kromelboog) in 2015. Kromelboog, owned by the Tamarisk Trust, is engaged in livestock farming. Dr. Smuts was also a trustee and executive officer of the Landmark Foundation Trust (Landmark), a not-for-profit charitable trust.?

A series of agreements were made between Tamarisk, Landmark, and Kromelboog to manage the properties for holistic farming methods. However, financial losses and disputes arose, leading to Dr. Smuts' removal as a director in 2021. The case centred on whether Dr Smuts' conduct justified a declaration of delinquency under section 162 of the Companies Act 71 of 2008.

Legal Issues

The court examined several key legal issues:

1. Dr. Smuts was accused of breaching his fiduciary duties by authorising payments to himself, using company funds for personal legal fees, and transferring company funds to Landmark without shareholder approval.
2. Dr. Smuts' dual roles in Kromelboog and Landmark created conflicts of interest, particularly in financial transactions and management decisions.

Section 76(2) stipulates that:

‘A director of a company must –

(a)????? not use the position of a director, or any information obtained while acting in the capacity of a director –

(i)?????? to gain an advantage for the director, or for another person other than the company or a wholly - owned subsidiary of the company. . .’

Moreover, Section 77(3)(a),(b) or (c) makes a director liable for loss or damage sustained by the company as consequence of the director having:

‘(a) acted in the name of the company, signed anything on behalf of the company, or purported to bind the company or authorise the taking of any action by or on behalf of the company, despite knowing that the director lacked the authority to do so;

(b)????? acquiesced in the carrying on of the company’s business despite knowing that it was being conducted in a manner prohibited by section 22 (1);

(c)????? been a party to an act or omission by the company despite knowing that the act or omission was calculated to defraud a creditor, employee or shareholder of the company, or had another fraudulent purpose. . .’

In Gihwala and Others v Grancy Property Ltd and Others [2016] ZASCA 35; [2016] 2 All SA 649 (SCA); 2017 (2) SA 337 (SCA), the Court described the type of conduct that would justify an order in terms of section 162(5)(c). The Court pointed out that the section is not concerned with some ‘trivial misdemeanor or an unfortunate fall from grace’.?

In terms of section 162(5)(c): ‘Only gross abuses of the position of director qualify. Next is taking personal advantage of information or opportunities available because of the person’s position as a director. This hits two types of conduct.

The first, in one of its common forms, is insider trading, whereby a director makes use of information known only because of their position as a director for personal advantage or the advantage of others.

The second is where a director appropriates a business opportunity that should have accrued to the company. Our law has deprecated that for over a century.

The third case is where the director has intentionally or by gross negligence inflicted harm upon the company or its subsidiary. The fourth is where the director has been guilty of gross negligence, willful misconduct or breach of trust in relation to the performance of the functions of the director or acted in breach of section 77(3)(a) to (c).

1. The court evaluated whether Dr. Smuts' actions constituted gross misconduct, including clearing Kromelboog's bank account before a shareholders' meeting and attempting to usurp Kromelboog's business operations.

In terms of s 162(5) of the Act:

‘A court must make an order declaring a person to be a delinquent director if the person . . .

(c)????? while a director –

(i)?????? grossly abused the position of director;

(ii)?????? took personal advantage of information or an opportunity, contrary to section 76(2)(a);

(iii)????? intentionally, or by gross negligence, inflicted harm upon the company or a subsidiary of the company, contrary to section 76(2)(a);

(iv)????? acted in a manner –

(aa) that amounted to gross negligence, wilful misconduct or breach of trust in relation to the performance of the director’s functions within, and duties to, the company; or

(bb) contemplated in section 77(3)(a),(b) or (c).

The court found that the facts outlined above overwhelmingly show that Dr Smuts conducted himself delinquently.? The position of the director is that of trust. The director owes fiduciary duties to the company. The conduct of the director in relation to the affairs of the company is strictly regulated by the Act. If a person commits serious misconduct of the sort described in Gihwala, that person must be declared a delinquent director. The court has no discretion in that regard.

Moreover, Dr Smuts was clearly in a conflicted position. That conduct clearly amounts to gross abuse of the position of a director and infliction of harm on Kromelboog. In addition, Dr Smuts’ actions also amount to gross negligence, wilful misconduct, and breach of trust.

Lessons Learnt

1. Directors must act in the best interests of the company and avoid conflicts of interest.
2. Maintaining transparency with shareholders and obtaining necessary approvals for significant decisions is crucial. This helps in building trust and avoiding legal disputes.
3. Understanding and complying with the Companies Act is essential.
4. Managing conflicts of interest effectively is vital. Directors should disclose any potential conflicts and recuse themselves from decisions where they have a personal interest.

By learning from the experiences of others, entrepreneurs and Directors can better navigate the complexities of corporate governance and ensure the long-term success of their ventures.

If you have any questions or need further assistance, feel free to reach out to us at SchoemanLaw Inc.