Legal Standing in Corporate Misconduct

May 22, 2024 | News

Analysing the rights of stakeholders to declare directors delinquent under the Companies Act with specific focus on the Myeni judgment.

Locus standi under common law has undergone significant changes due to the Companies Act 71 of 2008 (‘the Act’), and the impact of the judgment in the Organisation Undoing Tax Abuse NPC and Another v Myeni and Another ((15996/2017) [2019] ZAGPPHC 957) [1]  (the ‘Myeni Case’). Even though the misconduct of directors may not directly infringe the rights of shareholders or other stakeholders, section 162(2) of the Act confers locus standi to such listed persons[2]. This article will explore these developments and their implications.

The Act brought about a fundamental development to the classes of persons with legal standing to institute legal proceedings under the Act. Legal standing (‘locus standi’), concerns a person or an entity’s right to institute legal proceedings in any court. In Mars Incorporated v Candy World (Pty) Ltd[3]per Chithi AJ, the general rule was that the quantum of proof rested upon the party alleging that he or she had locus standi. As seen in Kommissaries van Binnelandse Inkomste v Van de Heever,[4]  a person with locus standi refers to ‘a person intending to institute or defend legal proceedings [who] must have a direct and substantial interest in the right which is the subject of the litigation’. This standard used to determine locus standi is generally applied to claims that are based on the statutes or the common law.

The decision in the Myeni Case shows that a director alleged to have breached provisions of the Act, can be sued by any person or entity, whether such person or entity is specifically mentioned in the list of parties entitled to bring the action under the relevant section of the Act, provided that they meet one of the criteria set out in Section 157(1) of the Act. The provisions of the Act, more specifically, Section 7, which sets out the purpose of the Act is a crucial starting point in the framework of South African company law.[5]

Section 66(1) of the Act provides for the affairs as well as business operations of a company to be managed by or under the direction of its board – of which powers are bestowed, to exercise all of the powers and to perform any of the functions of the company.[6] Although section 7(b)(iii) of the Act stipulates that the purpose of the Act is to encourage transparency and high standards of corporate governance as appropriate, the board of a company, which comprises of directors,[7] can abuse their power and not apply reasonable care, skill and diligence in exercising their duties. Notwithstanding that Chapter 7 of the Act provides for remedies and enforcement mechanisms, it appears to limit the classes of persons who have locus standi to approach a court to seek the appropriate relief.

Numerous academics have sought for the extension of locus standi under the Act and the abolishment of archaic common-law approaches which only protected the interest of shareholders of a company. The Myeni Case is a landmark case in South African company law as this case saw the first ever delinquency application brought to court by a party acting in the public interest. The Myeni Case saw an application of the extension of the scope of persons or entities with the right to institute legal proceedings under certain provisions of the Act. In the Myeni Case, the plaintiffs, Organisation Undoing Tax Abuse (‘OUTA’) as well as the South Africa Airways Pilot Association (‘SAAPA’), sought an order to declare the first defendant, Duduzile Myeni (‘Myeni’), who was the former non-executive chairperson of South African Airways SOC Ltd (‘SAA’), a delinquent director under section 162(2) of the Act.

Section 162(2) of the Act deals with the application to declare a director delinquent and furthermore lists the persons to whom the section confers locus standi  to launch a delinquency application under the section. Section 162(2) of the Act reads as follows:

‘162(2) A company, a shareholder, director, company secretary or prescribed officer of a company, a registered trade union that represents employees of the company or another representative of the employees of a company may apply to a court for an order declaring a person delinquent or under probation if -…’[8]

From the interpretation of the abovementioned section, on the face of it, OUTA appeared to have fallen outside of the ambit of persons with locus standi to bring a delinquency application under the section. As a consequence, OUTA sought leave from the court to bring an action under  section 157(1)(d) of the Act which provides for an extension of locus standi to institute legal proceedings to a party acting in the public interest. The aforementioned section gives any person or entity the right to bring an application before a court, with leave from the court, granted that the person is acting in the public interest.[9]

LOCUS STANDI UNDER COMMON-LAW

Under the common-law, the shareholder dominance theory was commonly applied. This theory established the traditional philosophy of corporate objectives which entrenched company ownership concepts.[10] It is noteworthy to reiterate that the main objective of the theories and approaches under common-law was to stress the importance of protecting the interests of shareholders and not that of other stakeholders.[11] Furthermore, under common-law, the approach was that the directors only owed duties to the shareholders and such duties were exercised for the benefit of the company with the exclusion of non-shareholder stakeholders.[12] 

Various other theories and approaches under common-law did not assist stakeholders, other than shareholders to establish locus standi in legal proceedings. This led to non-shareholder stakeholders being prejudiced in not being able to enforce their rights. It is evident that to establish locus standi for all non-shareholder stakeholders, the theories and approaches applied under common-law needed reform. Such reform was partially addressed through the Act.

LOCUS STANDI UNDER THE ACT

When determining locus standi, a court will have to consider whether provisions of the Act provide limitations for a party to institute legal proceedings. As a point of departure, the provisions of section 20(4) of the Act extends the parties which may have locus standi from those under the common-law in that ‘one or more shareholders, directors or prescribed officers of a company, or a trade union representing employees of the company, may apply to the [h]igh [c]ourt for an appropriate order to restrain the company from doing anything inconsistent with [the] Act’.[13] This section seems to promote the sentiments enshrined in section 7(b)(iii) of the Act, for example, to ensure that their interests in a company are protected, the persons listed in section 20(4) of the Act can approach a court seeking appropriate relief should a director who has responsibilities to promote a high standard of corporate governance, contravenes the provisions of the Act.

The extension of locus standi is further displayed under section 162(2) as well as section 165(2) of the Act. The aforementioned sections which deal with remedies and enforcements under the Act confers locus standi upon the following persons:

  • A company – which is defined as a juristic person incorporated in terms of the Act[14] can have locus standi in that it is a juristic entity separate from its shareholders.[15] Indubitably, a company is a separate legal juristic entity and may institute proceedings against a director in its own right as it has a vested interest in how its affairs are managed. Furthermore, a company will have locus standi granted that it is a shareholder of another company or a related company such as a subsidiary.[16] Such company would have a vested interest in the financial well-being as well as the daily operations of such company. An example of how the lack of the proper management of company which can affect another company which is a shareholder is when directors of a company do not fulfil their fiduciary duties which undeniably would result in a ripple effect on the employees, shareholders and other interested parties. As such, section 162(2) of the Act confers locus standi upon company to launch an application to declare a director delinquent.[17]
  • A shareholder –is defined as ‘the holder of a share issued by a company and who is entered as such in the certificated or uncertificated securities register, as the case may be’.[18] Section 162(2) of the Act confers locus standi upon a shareholder to launch an application to declare a director delinquent.[19] It is noteworthy to mention that shareholders have a right to good corporate governance of a company because shareholders have a vested financial interest in a company.  In addition, the provisions of the Act as set out in section 165(2)(a), stipulate that any person who ‘is a shareholder or is entitled to be registered as a shareholder, of a company or of a related company’, may institute legal proceedings to protect such company’s legal interests.[20] Shareholders also have a vested interest in the financial wellbeing of a company, the assets and liabilities of a company as well as the daily operations of a company. Shareholders have an interest in the acquisition as well as the disposal of the assets of a company which is of importance and would need to be done with the consent and knowledge of the shareholders.
  • A director – which is defined as ‘an individual who has been appointed as director, and one who may not be so appointed but nonetheless occupies the position or fulfils the role of a director’.[21] Section 162(2) of the Act confers locus standi upon a shareholder to institute legal proceedings to declare a director delinquent.[22] Furthermore, section 165(2(b) of the Act, confers locus standi upon directors to institute legal proceedings to protects the legal interests of the company.[23] Although directors have extended powers bestowed upon them under the Act, the Act seems to have opened directors up for a lot of exposure.
  • A company secretary –   which is not expressly defined in the Act, however, is deemed to be ‘an officer of a company’ who has been tasked to oversee the efficient administration of a company as set out in set Section 88(1) – (2) of the Act and, to ensure that the company complies with provisions of Section 33(3) of the Act.[24] Section 162(2) of the Act confers locus standi upon company secretaries to institute legal proceedings to declare a director delinquent.[25]
  • A prescribed officer of a company – which is defined under the Companies regulations in GN R351 in GG 342393 of 26 April 2011 (‘Regulations’), as a person who is not a director of a company but is seen to extensively participate in the exercise of the general executive control and management over the whole, or a significant portion, of the business operations and activities of a company, or to a large extent, regularly participates in the exercise of the general executive control and management over the whole, or a significant portion, of the business operations and activities of a company.[26] Under section 162(2) of the Act locus standi is conferred upon prescribed officers to institute legal proceedings to declare a director delinquent.[27] Likewise, under section 165(2)(b) of the Act, prescribed officers have locus standi to bring a derivative action to protects the legal interests of the company.[28]
  • A registered trade union that represents employees of a company –is defined under the Labour Relations Act 66 of 1995 as ‘an association of employees whose principal purpose is to regulate relations between employees and employers, including employers’ organisations’.[29] The development of the Act alludes that employees do indeed have a vested interest in the good governance of a company; however, employees cannot represent themselves under the Act. Section 20(4) of the Act confers locus standi upon trade unions to institute legal proceedings to restrain a company from doing anything inconsistent with the Act.[30] In parallel, section 162(2) as well as section 165(2)(b) of the Act extends the locus standi of trade unions to be able to bring a derivative action and declare a director of a company delinquent.[31]

AN EXTENSION OF LOCUS STANDI UNDER SECTION 157(1)(d) OF THE ACT

Section 38(d) of the Constitution of the Republic of South Africa, 1996 allows for any person acting in the public interest to seek relief from a court arising from an infringement or a perceived infringement of a right in the Bill of Rights.[32] The objective of Section 157(1)(d) is to remedy the shortcomings of the common-law in that it serves to extend the scope of the locus standi to individuals who wish institute legal proceedings acting in public interest. As seen in the Myeni judgment,[33] the Act provides for an extension of locus standi  to parties acting in public interest.  Section 157(1)(d) reads as follows:

‘157 Extending standing to apply for remedies

(1)When, in terms of this Act, an application can be made to, or a matter can be brought before, a court, the Companies Tribunal, the Panel or the Commission, the right to make the application or bring the matter may be exercised by a person-

(a)…;

(b)…;

(c)…;

(d) acting in the public interest, with leave of the court.’[34]

As a starting point, one must determine what constitutes public interest in the company law context. As seen in the Myeni Case, in its particulars of claim, OUTA inferred that it had locus standi to pursue the action, in that, it was acting in the public interest. OUTA further mentioned that their right to act in the public interest arose ‘from its primary objectives, which include, a) the protection and advancement of the Constitution, as well as the promotion of effective, protocol and enforceable taxation policies, which are free from corruption and, b) the proper management of all major public entities’.[35] The factors determining public interest were mentioned in Ferreira v Levin No & Others; Vryenhoek & Others v Powell No & Others[36] per Ackerman J, as follows:

‘[234]…Factors relevant to determining whether a person is genuinely acting in the public interest will include considerations such as: whether there is another reasonable and effective manner in which the challenge can be brought;  the nature of the relief sought, and the extent to which it is of general and prospective application; and the range of persons or groups who may be directly or indirectly affected by any order made by the court and the opportunity  that those persons or groups have had to present evidence and argument to the court. These factors will need to be considered in the light of the facts and circumstances of each case.’

Further to the above, in the Myeni Case, the court held that OUTA had the requisite locus standi in terms of section 157(1)(d) because it is a non-profit organisation entrusted with the duty to protect taxpayers as well as to ensure that state owned enterprises are accountable to all stakeholders.[37] In addition, in paragraph 32,[38] Tolmay J, further exemplifies OUTA’s locus standi and mentioned that taxpayers must not only have an interest in how SAA is run – as they partly fund the operations of SAA through their taxes, but, they also have an interest in who is appointed as a director and as result, may bring proceedings to hold such directors accountable should the director fail to fulfil his or her fiduciary duties.

CONCLUSION

Is clear that the public interest element did not play a significant role in delinquency applications under common-law. As alluded to above, the decision in the Myeni Case definitely shows, that a director alleged to have breached the Act, can be sued by any person or entity, whether such person or entity is specifically mentioned in the list of persons entitled to bring the action under the provisions of the Act, more specifically, Section 157(1)(d) of the Act.

When interpreting Section 157(1)(d) of the Act, it is apparent that the concept of public interest is a variable concept, and a court would need to apply the test for public interest on a case-by-case basis. It is worthy to mention that there is no set standard to determine public interest under the Act. Therefore, when looking at the wording of Section 157(1)(d) of the Act, a disadvantage could be that a very wide net is casted for the interpretation of persons who are able to act in the public interest. One has to consider whether there are limitations to persons who are able to institute proceedings acting in public interest.

A court, when exercising its discretion in establishing whether a person has locus standi, must apply a high degree of care. Notwithstanding the fact that section 157(1)(d) offers an extension of locus standi to persons or entities acting in the public interest, it is worthy to emphasis that it opens up a net for broad interpretation. Because a court will need to determine what constitutes public interest on a case-by-case basis. A concern that courts will need to guard against is the risk that this may lead to the abuse of the judicial system and result in a floodgate of frivolous and vexatious litigation. Courts must not only apply the test applied in the Myeni Case but must also consider the relationship between the plaintiff and the defendant and determine whether it is a remote or significantly close relationship.

I hold the view that when balancing the shortcomings and the benefits of the Act, the disadvantages of section 157(1)(d) are far outweighed by the positive impact it has made and continues to make in the framework of South African company law. This section affords a larger group of persons who have been negatively affected by the mismanagement of a company to have locus standi to bring delinquency applications.

Furthermore, section 162(2) of the Act aims to make directors more accountable for their actions to the company, shareholders, directors, company secretary or prescribed officers, and furthermore, the employees of the company – this raises the standards of good behaviour and integrity expected of directors.[39] At present, delinquency applications are not available to creditors of companies despite them often being the most negatively impacted. Evidently, the Act will require further development for the public interest test to be expanded to include this category.

It is therefore submitted that the development of the Act, more specifically, Section 157(1)(d), as seen in the Myeni Case, will serve as an effective enforcement mechanism in combatting current issues faced in South Africa such as the abuse of powers[40] as well as fraud and corruption.

By Vuyo Shongwe | Candidate Attorney at Fairbridges Wertheim Becker

REFERENCES:

CASES:

  • Airport Cold Storage (Pty) Limited v Ebrahim and Others (3181/06) [2007] ZAWCHC 25; 2008 (2) SA 303 (C) ; (22 May 2007) at par 17
  • Ferreira v Levin NO and Others; Vryenhoek and Others v Powell NO and Others (CCT5/95) [1995] ZACC 13; 1996 (1) SA 984 (CC); 1996 (1) BCLR 1 (6 December 1995)
  • Kommissaries van Binnelandse Inkomste v Van de Heever 1990 (3) SA 1051 (SCA)
  • Mars Incorporated v Candy World (Pty) Ltd  (265/89) [1990] ZASCA 149; 1991 (1) SA 567 (AD); [1991] 2 All SA 25 (A) (28 November 1990)
  • Organisation Undoing Tax Abuse NPC and Another v Myeni and Another ((15996/2017) [2019] ZAGPPHC 957)

JOURNAL ARTICLES:

  • Darren Subramanien ‘“Legal standing” and “the demand” in Section 165 of the Companies Act 71 of 2008: a comparative discussion’Obiter vol.43 n.2 Port Elizabeth  2022
  • Jens Heyerdahl ‘Legal Standing Rules Under the Companies Act, 2008: A Critical Review’  (2021) 7(1) JCCL&P at 104.
  • Cassim R ‘Delinquent Directors under the Companies Act 71 of 2008: Gihwala v Grancy Property Limited 2016 ZASCA 35’ PER / PELJ 2016(19)

LEGISLATION:

  • The Constitution of the Republic of South Africa, 1996
  • The Companies Act 71 of 2008 (as amended)
  • The Labour Relations Act 66 of 1995

THESIS:

  • Ntsako Sharon Msomi An Analysis Of Extended Locus Standi For The Derivative Action And The Oppression Remedy Under The Companies Act 71 of 2008 (published LLM thesis, University of Pretoria, 2019)

WEBSITES:


[1] ((15996/2017) [2019] ZAGPPHC 957).

[2] Companies Act s 162(2).

[3] 1991 (1) SA 567 (AD) at par 14.

[4] 1990 (3) SA 1051 (SCA) par 10.

[5] Companies Act s 7.

[6] Ibid s 66(1).

[7] Ibid s 66(2).

[8] Ibid s 162(2).

[9] Ibid s 157(1)(d).

[10] Jens Heyerdahl ‘Legal Standing Rules Under the Companies Act, 2008: A Critical Review’  (2021) 7(1) JCCL&P at 104.

[11] Ibid at 105.

[12] Ibid at 104.

[13] Companies Act s 20(4).

[14] Ibid s 1.

[15] Airport Cold Storage (Pty) Limited v Ebrahim and Others (3181/06) [2007] ZAWCHC 25; 2008 (2) SA 303 (C) ; (22 May 2007) at par 17.

[16] Darren Subramanien ‘“Legal standing” and “the demand” in Section 165 of the Companies Act 71 of 2008: a comparative discussion’Obiter vol.43 n.2 Port Elizabeth  2022

[17] Companies Act s 162(2).

[18] Ibid s 1.

[19] Ibid s 162(2).

[20] Ibid s 165(2)(a).

[21] Ntsako Sharon Msomi An Analysis Of Extended Locus Standi For The Derivative Action And The Oppression Remedy Under The Companies Act 71 of 2008 (published LLM thesis, University of Pretoria, 2019) 19

[22] Companies Act s 162(2).

[23] Ibid s 165(2)(b).

[24] Advocate Tina Rabilall ‘Guidance Note 1 of 2017: The Role Of The Company Secretary In A Modern Company’ available athttps://www.cipc.co.za/wp-content/uploads/2020/10/Guidance_Note_1_of_2017_Company_Sec.pdf  , accessed on 24 October 2023.

[25] Companies Act s 162(2).

[26] Reg 38(1)(a)-(b)

[27] Companies Act s 162(2).

[28] Ibid s 165(2)(b).

[29] Labour Relations Act 66 of 1995 s 213

[30] Companies Act s 20(4).

[31] Ibid ss 162(2) and 165(2)(b).

[32] Constitution of the Republic of South Africa, 1996 s 38(d).

[33] ((15996/2017) [2019] ZAGPPHC 957) at par 34.

[34] Companies Act 157(1)(d).

[35] ((15996/2017) [2019] ZAGPPHC 957) at par 2

[36] 1996 (1) SA 984 CC at par 234.

[37] ((15996/2017) [2019] ZAGPPHC 957) at par 29

[38] Ibidat par 32

[39] Cassim R ‘Delinquent Directors under the Companies Act 71 of 2008: Gihwala v Grancy Property Limited 2016 ZASCA 35’ PER / PELJ 2016(19)

[40] Jens Heyerdahl ‘Legal Standing Rules Under the Companies Act, 2008: A Critical Review’  (2021) 7(1) JCCL&P at 112.