Section 162 of the Companies Act, Act 71 of 2008 ("the Companies Act") introduced a new mechanism which allows a broad range of interested and related persons, including qualifying organs of state, the opportunity to apply to court for an order declaring a director of a company delinquent or placing him under an order of probation. Notwithstanding the negative social ramifications such an order has, there are also severe adverse consequences  to a director's present and future ability to act as a director for any company and may be applied for by, any organ of state, including, the South African Revenue Service ("SARS") under certain circumstances. It is important for directors to avail themselves of the relevant provisions and be acutely aware of when such an order can be granted in light of their potential exposure and liability, which seems a lot easier than one may think, especially in respect of an application by SARS.

Section 162(4) of the Companies Act states as follows:

"Any organ of state responsible for the administration of any legislation  may apply to a court for an order declaring a person delinquent if-

a.the person is a director of a company or, within 24 months immediately preceding the application, was a director of a company; and

b. any of the circumstances contemplated in subsection (5)(d) to (f) apply with respect to any legislation administered by that organ of state."

"Legislation" is widely defined and for purposes of this section includes any national or provincial legislation relating to the promotion, formation or management of a juristic person; regulating an industry or sector of an industry; or imposing obligations on, prohibiting any conduct by, or otherwise regulating the activities of a juristic person.

Having regard to the above it is contended that SARS falls within the definition of 'organ of state responsible for the administration of any legislation' as SARS is responsible for the administration of, inter alia, the Tax Administration Act, Act 28 of 2011 ("TAA") and the Income Tax Act, Act 58 of 1962 ("the ITA") which imposes several obligations on juristic persons including, but not limited to, the submission of tax returns.

A qualifying organ of state is, however, limited in its ability to apply to court to declare a director delinquent to the extent that it is only able to apply under certain specific grounds of delinquency and cannot lodge an application for an order of probation. A qualifying organ of state, can thus only apply for a 'delinquency order'  where: 

a. The director has repeatedly been subject to a compliance notice  or similar enforcement mechanism, for substantially similar conduct, in terms of any legislation [section 162(5)(d)];

  • It is contended that the wording of the Act is wide enough that it encompasses requests to submit an outstanding personal tax return or letters of demand from SARS to submit supporting documents.

b. The director has at least twice been personally convicted of an offence  or subjected to an administrative fine or penalty in terms of any applicable legislation [section 162(5)(e)]; or

  • An administrative non-compliance penalty levied against the taxpayer in terms of section 210 and 211 of the TAA as a result of a failure to submit a personal tax return within the proclaimed timeframes would arguably apply in this instance.

c. The director was responsible for the management of such juristic person  at the time of the contravention resulting in a conviction, administrative fine or penalty, and, having regard to the nature of the contraventions and the circumstances of the director's alleged misconduct the court is satisfied that the declaration of delinquency is justified [section 162(5)(f)].

Thus, to the extent that SARS does fall within the meaning of 'organ of state', it can only apply for a delinquency order in the above three situations. Nevertheless, the grounds for delinquency are extremely wide and the use of the word 'must' in section 162(5) results in the situation that a court is not afforded a discretion to grant an order of delinquency in respect of the first two grounds but is obligated to do so.

The effect of an order of delinquency is very serious and essentially results in that person being disqualified from being a director of a company which impacts on the very livelihood of an individual. The order may  under certain circumstances be unconditional and continue for the lifetime  of a delinquent director or it may be conditional and continue for a minimum of seven years or longer, as determined by the court.

There is at the very least some relief in the Act for directors which enables them the opportunity to apply to court to suspend the order of delinquency. In terms of section 162(11)(a) of the Act, a delinquent director can apply to court three years  after the order of delinquency, to suspend such an order and substitute it  for an order of probation. In terms of section 162(11)(b) of the Act, a qualifying director may thereafter apply for an order of delinquency to be set aside two years after it was suspended and substituted as an order of probation.

While the relief contained in this section is welcomed, it must be noted that a court will not set aside such an order unless the delinquent director has satisfied any conditions attaching to the original order, and furthermore the court must be satisfied that the applicant has demonstrated satisfactory progress towards rehabilitation  and that there is a reasonable prospect that he will be able to serve successfully as a director of a company in the future. One must be mindful of the fact that the effect of this section is that once an order of delinquency has been granted, such an order can only be set aside after a cumulative five years.

It is contended that a decision by an organ of state to apply for a court order declaring a director delinquent constitutes an administrative act as envisaged in section 33 of the Constitution of the Republic of South Africa, 1996 ("the Constitution") and that the provisions of the Promotion of Administrative Justice Act, No 3 of 2000 ("PAJA"), apply thereto. Thus, while there are no express provisions contained in the Companies Act directing that a qualifying organ of state (SARS) must provide adequate notice and reasons to the relevant director, it is contended that such a procedure would ensure that just administrative action is meted out. This would enable the relevant director to make sufficient representations to SARS in line with the audi alteram partem rule accepted into our law and furthermore, would be a useful mechanism in averting the extreme consequences of such an order where the wide statutory requirements have technically been met, but mitigating circumstances cannot be taken into account as a result of the non-discretion afforded to the court.

The effect of such an order, while seemingly very harsh is nevertheless a high possibility, where a director has more than once not complied with an administrative compliance notice issued to either himself personally or in his representative capacity of a company must, on application by SARS, be declared a delinquent director. It seems iniquitous and slightly draconian that a director can be suspended from acting as such for a period of at least five years for failing to submit a personal or VAT return for two consecutive months.

While fortunately there has not in practice, been extensive application of section 162 of the Companies Act by SARS, it nevertheless remains a very real mechanism which could enable SARS to further sanction a director in control of an organisation which has not complied with certain sections of the TAA or ITA. In addition, while it seems a lesser punishment than pursuance of a criminal prosecution and conviction, it nevertheless has very serious consequences  and the wide drafting of the provisions result in the fact that it would not be difficult for SARS to argue for the granting of such an order in certain instances.

Directors should therefore not only ensure that they are observing the highest standard in respect  of their ordinary fiduciary duties, it also places an extremely high level of compliance  with the administrative provisions of any of the tax Acts. In order to avert such an order, all directors must therefore ensure that not only are their own tax affairs in order, but the companies on which boards they serve are too. In particular, directors need to put in place measures and policies  to ensure that no administrative penalties are levied or compliance notices issued by SARS on a repetitive basis which could lead to such a court order.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.