The recent High Court judgment in Delta Property Fund Limited v Nomvete and Others highlights the serious consequences directors face when they fail to uphold their fiduciary duties and engage in undisclosed transactions that place personal interests above the welfare of the company.
The case provides a crucial reminder of the regulatory framework established by the Companies Act and how a directors and officers liability policy may – or may not – respond in cases of misconduct.
The case stemmed from a forensic investigation into financial irregularities at Delta Property Fund, a prominent real estate investment trust. The plaintiff, Delta, alleged that its former chief executive, Sandile Nomvete, former chief financial officer Shaneel Maharaj, and former chief operating officer Otis Tshabalala, engaged in misconduct that resulted in substantial financial losses. The allegations included improper transactions with third parties, breaches of fiduciary duties, and fraudulent financial dealings.
Conflict of interest and the Companies Act
The Companies Act contains stringent provisions to regulate conflicts of interest among directors. The three relevant sections are:
- Section 75(1) requires directors to disclose any personal financial interest they (or related persons) have in company transactions.
- Section 76(2) imposes a duty on directors to act in good faith and in the best interests of the company.
- Section 76(3) demands that directors perform their functions with the necessary care, skill, and diligence expected of someone in their position.
The failure to disclose a conflict of interest is not a mere administrative oversight but a violation of the fundamental principles of corporate governance. The Act, through section 162(5), provides for the declaration of delinquency against directors who grossly abuse their position or place their personal interests above the company’s.
The judgment discloses that the directors engaged in various transactions that placed their personal interests ahead of the company’s. These include:
- Engaging in undisclosed brokering agreements with entities in which they had personal financial interests, thereby directing company funds for their own benefit.
- Misrepresenting to the board that management was handling negotiations, whereas third-party entities were receiving commissions without proper due diligence.
- Entering lease agreements that exposed the company to financial risk and reputational damage by failing to act in its best interests.
- Receiving undisclosed payments and facilitating transactions that lacked transparency and ethical oversight.
Do the above transgressions fall within the realm of director delinquency? Section 162 of the Act allows a court to declare a director delinquent if they engage in misconduct, including gross negligence, dishonesty, or abuse of power.
A delinquency declaration can result in a ban from holding directorships for a specified period or even permanently, depending on the severity of the misconduct.
The most famous case of director delinquency was Duduzile Myeni, who was declared a delinquent director for life after misconduct during her tenure as the chief executive of South African Airways.
The primary purpose of section 162(5) is to protect companies, shareholders, employees, and the public from directors who abuse their positions. Section 162(5) acts as a safeguard against corporate misconduct, reinforcing the integrity of the business environment by ensuring that unfit directors are removed from leadership positions.
In the Delta Property Fund case, the court found that the directors had grossly abused their positions and engaged in reckless conduct that severely harmed the company. In light of these findings, the judge declared them delinquent under section 162(5) of the Act.
In the instituted action, Delta asked that the directors be held liable in terms of section 77 of the Act for certain damages, losses, and costs incurred due to their actions.
Section 77 of the Act plays a crucial role in regulating directors’ liability, stipulating the circumstances under which directors may be held personally liable for breaches of their duties. It outlines specific instances of misconduct, including gross negligence, intentional misconduct, and violations of fiduciary duties.
The court ordered the directors to compensate Delta for losses incurred due to their actions, including the costs of forensic investigation costs and reputational harm.
Will D&O liability insurance respond?
A D&O liability policy is designed to protect directors against claims arising from decisions made in their official capacity. However, coverage under a D&O policy is typically subject to key exclusions, particularly in cases of dishonesty, fraud, or wilful misconduct.
In this case, the directors’ conduct (ranging from non-disclosure to active misrepresentation) would likely trigger policy exclusions. Most D&O policies exclude coverage for:
- Fraudulent or criminal acts. The court found that the directors engaged in unlawful conduct, including acts of corruption as defined by the Prevention and Combating of Corrupt Activities Act.
- Personal profit. The directors gained secret profits from undisclosed transactions, so the insurer would likely deny coverage on the basis that a D&O policy does not indemnify illicit personal gains.
- Deliberate acts of misconduct. The court’s ruling that the directors acted recklessly and in bad faith would further bar coverage, because most policies exclude claims arising from wilful breaches of duty.
Although D&O insurance provides critical protection for directors who act within the scope of their duties, it does not serve as a shield for intentional misconduct or breaches of fiduciary duty. The Delta case highlights the importance of adhering to governance principles, because failure to do so leads to legal consequences and may render insurance coverage ineffective.
Conclusion
The Delta case is a stark warning to directors about the dangers of conflicts of interest and self-dealing. South African corporate law, through the Companies Act, imposes clear obligations on directors to act in their company’s best interests and fully disclose any personal interests in company transactions. The consequences of non-compliance can be severe, including financial liability, reputational damage, and disqualification from serving as a director.
For directors and companies, the judgment underscores the need for robust internal controls, transparent corporate governance, and an understanding of the limitations of D&O insurance. Ultimately, ethical leadership and strict adherence to fiduciary duties remain the best protection against legal and financial risks.
This article was written by Mongezi Mpahlwa, a partner in Cox Yeats’ business rescue and insolvency team, and Tshilidzi Mudau, a candidate attorney at the same law firm.
Disclaimer: The views expressed in this article are those of the writers and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article is a general guide and should not be used as a substitute for professional legal advice.
