The removal of a director is often a contentious affair, especially when the director in question has no intention to relinquish the position. It becomes even more complex when the director is also a shareholder and can exercise some control over the very attempt at his or her removal.
The Companies Act 71 of 2008 (the "Act") anticipates the possibility of conflict in companies. Section 7 makes it clear that one of its purposes is to balance the rights and obligations of shareholders and directors. To achieve this goal, section 71 provides a comprehensive process for the removal of directors – with its main aim being to ensure that the process is conducted fairly.
The recent ruling by the Companies Tribunal ("Tribunal") in Mdumela v Van Wyk and Another1 highlights the importance of procedural fairness in the removal of directors.
Section 71 differentiates between companies with three or more directors (subsection 3) and those with fewer than three directors (subsection 8). In instances where there are only two directors, section 71(8) anticipates that there may be a deadlock in the removal of a director.
Section 71(8) states that:
(8) 'If a company has fewer than three directors-
- subsection (3) does not apply to the company;
- in any circumstances contemplated in subsection (3), any director or shareholder of the company may apply to the Companies Tribunal, to make a determination contemplated in that subsection; and
- subsections (4), (5) and (6), each read with the changes required by the context, apply to the determination of the matter by the Companies Tribunal.'
The effect of section 71(8)(b) is to permit a shareholder or director of a company with fewer than three directors to apply to the Tribunal for an order to remove a director on any of the grounds of disqualification, ineligibility, incapacity, and neglect or dereliction in the performance of the functions of a director.
In Mdumela, one director (the "Applicant") applied to the Tribunal for an order to remove her co-director (the "First Respondent") as a director of Property to Link (Pty) Ltd, an estate agent company in which they were joint and equal shareholders.
During the course of 2023, disputes arose between the directors, resulting in the First Respondent tendering her resignation as a director. Attached to her resignation were certain proposals made as part of a settlement offer. The Applicant accepted the First Respondent's resignation, but rejected the settlement offer. The First Respondent would later claim that the Applicant's failure to accept the settlement meant that her resignation as a director lapsed. There is no merit to this argument, as resignation is considered to be a unilateral act.2 Nevertheless, by the time the Applicant filed the application, the First Respondent had not been removed as a director on the records of the Companies and Intellectual Property Commission (CIPC).
The grounds for the removal were stated as: (a) the fact that the First Respondent had resigned; (b) neglect and dereliction of director duties; and (c) failure to act in good faith. The Applicant alleged, inter alia, that the First Respondent:
- had not carried on the duties of a director since August 2023;
- still had access to the company's bank account, and continued transacting to the detriment of the company;
- refused to hand over the books of the company, in an attempt to cause harm to the company; and
- was operating another estate agency, unlawfully and in competition with the company.
Applications to the Tribunal must be compliant with Regulation 142 of the Companies Act Regulations, 2011. Regulation 142 states that –
(1) 'A person may apply to the Tribunal for an order in respect of any matter contemplated by the Act, or these regulations, by completing and filing with the Tribunal's recording officer –
- an Application in Form CTR 142; and
- a supporting affidavit setting out the facts on which the application is based
(2) The applicant must serve a copy of the application and affidavit on each respondent named in the application, within 5 business days after filing it.'
Service of the Form CTR 142 and affidavit on the respondent(s) is an absolute requirement of Regulation 142. The purpose is to ensure fairness, as it informs a respondent of the basis of the application and the relief sought against them and allows them an opportunity to participate in the director removal process.
In Mdumela, the Form CTR 142 and affidavit were not served on the First Respondent. The Tribunal pointed out that the requirement to serve the application and supporting documents on respondents must be complied with.
As a result, and despite agreeing that the First Respondent had indeed been neglectful and derelict in her duties as a director, the Tribunal refused to grant the order. It ruled –
'Having considered the provisions of section 71 of the Act and the communication provided to the Tribunal I am of the considered view that the Respondent has neglected her functions as a director of the company.
However due to non-compliance by the Applicant with the requirements of Regulation 142, I am unable to grant the order as sought by the Applicant.'
This ruling emphasises the importance of due process in the removal of a director. Even a director such as the First Respondent, who is a clear candidate for removal, must be treated fairly.
It also serves as a caution to shareholders and directors that non-compliance with the procedural requirements of the Act and Regulations may result in applications for director removal being denied, even when a clear case has been made. This may also lead to additional costs being incurred from reinitiating the process. In Mdumela, the Tribunal made it clear that the Applicant had to re-issue and comply with Regulation 142 before it could consider the application again.
Footnotes
1. CT01744/ADJ/2024.
2. Havenga in 'Recent cases on company directors' 2005 at 136:
'Depending on what is required in a company's articles of association, a director may resign from office by giving written or oral notice to that effect to the company or the board of directors. As resignation is taken to be a final unilateral act, the concurrence or acceptance of the company is not required to terminate the appointment'.
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