Tribunal takes no nonsense with director removals

Relevant background

Section 71(3) of the Act states that if a company has more than two directors, and a shareholder or director has alleged that a director of the company:

• has become (i) ineligible or disqualified in terms of the Act or (ii) incapacitated to the extent that the director is unable to perform the functions of a director, and is unlikely to regain that capacity within a reasonable time; or
• has neglected the functions of director,
• the board (excluding the director concerned) must determine the matter by resolution, and may remove a director.

Section 71(4) of the Act states that before the board of a company may consider a resolution contemplated in subsection 3, the director concerned must be given (i) notice of the meeting, including a copy of the proposed resolution and a statement setting out reasons for the resolution, with sufficient specificity to reasonably permit the director to prepare and present a response and (ii) a reasonable opportunity to make a presentation, in person or through a representative, at the meeting before the resolution is put to a vote.

Section 71(8), however, states that if a company has fewer than three directors then subsection 3 does not apply. However, any director or shareholder of the company may apply to the Tribunal to remove the relevant director on the same grounds as those listed in subsection 3.

Regulation 143 of the Act sets out the procedure for respondents to follow should they oppose the relief sought under section 71(8) of the Act. The procedure includes the filing of an answering affidavit in response to the complaint.

Facts

The second respondent in this case was Hahn Collections (Pty) Ltd (the company). The applicant was Gordon Vaughan Howard, a shareholder of the company. The first respondent was Graham Dudley Powell, a director of the company, whom the applicant was trying to remove from that position. 

As the company had fewer than three directors, the applicant applied to the Tribunal to, amongst other things, remove the first respondent as a director of the company in terms of section 71(8) of the Act. The applicant alleged that the first respondent had neglected his fiduciary responsibilities towards the company in that he failed to ensure that the company adhered with a compliance notice issued by the Companies and Intellectual Property Commission.

The first respondent and the company (as the second respondent) (collectively the respondents) argued that:

• The section 71(4) notice under the Act was peremptory before launching an application to the Tribunal and had not been complied with.
• The Tribunal lacked the jurisdiction to adjudicate the matter since, subsequent to the proceedings being launched, two further directors had been appointed to the company’s board. This, it was argued, meant that the company no longer had fewer than three directors and therefore section 71(8) was no longer applicable. That being the case, the Tribunal had lost its jurisdiction in the matter.

Ruling

The Tribunal confirmed that the wording of section 71(8) of the Act indicates the legislature’s intention. It states that if a company has fewer than three directors, then section 71(3) does not apply to the company, and any director or shareholder would then have to apply to the Tribunal to remove director(s) under subsection 8. The Tribunal found that:

• the removal of a director contemplated in subsection 8 is an alternative mode of removal to that in subsection 3; and
• the wording of subsection 4 – being that before the board of a company may consider a resolution contemplated in subsection 3, the director must be given notice of such a meeting under subsection 4 – means that subsection 4 is only a requirement when following the process in subsection 3. Therefore subsection 4 does not apply when following the process in subsection 8.

The respondents failed on their subsection 4 argument.

In relation to the respondents’ argument regarding the appointment of further directors, which affected the Tribunal’s jurisdiction, the Tribunal found that:

• these appointments were made subsequent to the launching of the proceedings before the Tribunal and hours before the hearing by the Tribunal;
• the only inference to be drawn from these actions was that they were done to circumvent the Tribunal from hearing the matter; and
• the Tribunal could only consider the papers filed before it, and it was therefore not bound to consider the appointment of new directors in the ongoing proceedings.

Accordingly, the Tribunal maintained its jurisdiction notwithstanding the new appointments and the respondents failed in their jurisdiction argument.

Having confirmed its jurisdiction and that the applicant followed the correct procedure in terms of the Act, the Tribunal ruled in favour of the applicant on the merits (the respondents having failed, by choice, to file an answering affidavit).

It was consequently ordered that the first respondent be removed as a director of the company due to the breach of his fiduciary duties to the company in that he had failed to ensure that the financial reporting of the company was compliant.

Conclusion

It is submitted that the Tribunal was fair in its finding.

The intention of the process stipulated in section 71(4) of the Act is to give effect to the legal principle of audi alteram partem, which means that both sides must be given an opportunity to be heard. A director has an opportunity to make representations and state their case at the relevant meeting before a vote is taken for their removal.

Although section 71(4) does not apply to section 71(8) the principle of audi alteram partem is protected by Regulation 143 of the Act, which allows a director to state their case by way of an answering affidavit before the Tribunal hears the matter. Neither the Tribunal nor the applicant can be found wanting if the respondents forsake their opportunity to file an answering affidavit, as occurred in this matter.