By Uzukhanye Myoywana

Smuts v Kromelboog Conservation Services (Pty) Ltd and Another (SCA) (unreported case no 511/2023, 14-11-2024) (Dambuza, Mabindla-Boqwana and Molefe JJA and Hendricks and Baartman AJJA)

It often becomes easy for directors of companies to blur the lines between their fiduciary duties prescribed to them by the Companies Act 71 of 2008 (Companies Act) to act in the best interest of the company and the limited liability afforded by juristic entities. These lines are increasingly ever more present in the corporate sphere where we see directors overreaching by breaching their fiduciary duties and in so doing, failing to act in the best interest of the company. It has become common for directors, particularly sole directors, to dip into the company’s proverbial ‘cookie jar’, using their positions to enrich themselves by misappropriating and conveniently misplacing company funds through other juristic channels such as trusts, foundations and NPO’s, and prioritising their personal needs to the detriment of the company.

In the case of Smuts, the SCA adequately captures the essence of the foregoing caution against a director’s inability to check their instincts towards self-enrichment at the cost of the company.

The matter was initially heard by the Western Cape Division of the High Court in Cape Town before Henney J as the court a quo, where Dr Boudewyn Homburg De Vries Smuts (Dr Smuts) was declared a delinquent director in terms of s 162 of the Companies Act for numerous acts which the court a quo determined amounted to gross abuse of the position of a director. These acts included infliction of harm on Kromelboog; gross negligence; wilful misconduct and breach of trust. The afore was determined following complaints which were laid against Dr Smuts, namely –

• the clearing of funds from Kromelboog’s bank account;
• freezing of Kromelboog’s bank account;
• use of Kromelboog’s funds for legal fees;
• a donation from Kromelboog to Landmark Foundation Trust (Landmark);
• invoicing for vague and ambiguous alleged services rendered; and
• seeking to takeover possession of Kromelboog’s operations.

Dr Smuts appealed this order to the Supreme Court of Appeal (SCA) before Mabindla-Boqwana JA with Dambuza and Molefe JJA and Hendricks and Baartman AJJA and concurring, when the appeal was dismissed and the order of the court a quo upheld declaring Dr Smuts a delinquent director in terms of s 162 of the Companies Act.

Background facts

Dr Smuts was appointed as a sole director of Kromelboog Conservation Services (Pty) Ltd (Kromelboog), which in turn was owned by the Tamarisk Trust, the trustee of which was Mr Timothy Allsop (the Trust). He was also the founder of Landmark. Kromelboog was hired to manage the four properties bought by the Trust and leased to Kromelboog.

It is evident, however, that during the course of the years, the relationship between the parties (Dr Smuts as the director of Kromelboog and, trustee as well as ‘executive officer’ of the Landmark deteriorated, Dr Smuts was subsequently served with a notice of removal as Director of Kromelboog. The reasons for the removal were relayed as –

• the insolvency position of Kromelboog due to accumulated losses of more than R16 million for the first six years of the carrying out of business between the parties;
• the breakdown of trust between the parties;
• disparaging remarks made by Dr Smuts against the Trust; and
• a clear conflict of interests between Dr Smuts position as Director of Kromelboog and trustee of Landmark.

Dr Smuts alleges that a Joint Venture oral agreement (JV), was concluded in 2013, between Landmark and the Trust represented by Mr Allsop (as a trustee of the Trust) which related to the acquisition of the right to utilise and operate farmland for a generational period of 25 years. It is alleged that Mr Allsop subsequently repudiated this oral agreement by asking Dr Smuts and Landmark on or around 5 January 2021 to vacate the farms, which was subsequently accepted in May 2021.

It was discovered that, shortly before his removal as a director, Dr Smuts made a handful of transactions in his remaining days as director of Kromelboog.  Kromelboog then brought an application in the High Court to declare Dr Smuts a delinquent director in terms of s 162(5) of the Act.

Section 162(5) of the Companies Act reads:

‘A court must make an order declaring a person to be a delinquent director if the person –

…

(c) while a director –

(i) grossly abused the position of director;

(ii) took personal advantage of information or an opportunity, contrary to section 76(2)(a);

(iii) intentionally, or by gross negligence, inflicted harm upon the company or a subsidiary of the company, contrary to section 76(2)(a);

(iv) acted in a manner –

(aa) that amounted to gross negligence, wilful misconduct or breach of trust in relation to the performance of the director’s functions within, and duties to, the company; or

(bb) contemplated in section 77(3)(a), (b) or (c).’

The application was heard by Henney J in the court a quo, who found that the grounds for declaring delinquency under s 162(5) had been met, based on the complaints against Dr Smuts and the reasons provided by Kromelboog for his proposed removal as a director.

The SCA judgment

The main issue on appeal in the SCA, was the question whether the conduct of Dr Smuts justified the declaration of delinquency in terms of s 162(5) of the Companies Act.

In casu, the SCA placed reliance on the following provisions of the Companies Act, to determine the breach of Dr Smuts fiduciary duties as a director for the reasons that led to his removal and complaints which led to him being declared a delinquent director in terms to of s 162(5) of the Companies Act:

Section 76(2) which provides –

‘A director of a company must –

(a) not use the position of director, or any information obtained while acting in the capacity of a director –

(i) to gain an advantage for the director, or for another person other than the company or a wholly-owned subsidiary of the company; or

(ii) to knowingly cause harm to the company or a subsidiary of the company; and

(b) communicate to the board at the earliest practicable opportunity any information that comes to the director’s attention, unless the director –

(i) reasonably believes that the information is –

(aa) immaterial to the company; or

(bb) generally available to the public, or known to the other directors; or

(ii) is bound not to disclose that information by a legal or ethical obligation of confidentiality.’

Read with s 77(3)(a), (b) and (c) which states that –

‘A director of a company is liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the director having –

(a) acted in the name of the company, signed anything on behalf of the company, or purported to bind the company or authorise the taking of any action by or on behalf of the company, despite knowing that the director lacked the authority to do so;

(b) acquiesced in the carrying on of the company’s business despite knowing that it was being conducted in a manner prohibited by section 22(1);

(c) been a party to an act or omission by the company despite knowing that the act or omission was calculated to defraud a creditor, employee or shareholder of the company, or had another fraudulent purpose.’

The SCA also looked at the Gihwala and Others v Grancy Property Ltd and Others [2016] 2 All SA 649 (SCA) judgment, where in paras 143 and 144, the court described the type of conduct that would justify an order in terms of s 162(5)(c), positing that those types of conduct include: Gross abuse of the position of director; and taking personal advantage of information or opportunity available because of the person’s position as a director etcetera. Opining that it (the court) is not concerned with some ‘trivial misdemeanour or an unfortunate fall from grace’, but where a director is deemed to have committed serious misconduct the court has no discretion but to declare a person to be a delinquent director.

In determining whether Dr Smuts’ declaration of delinquency was justified, the SCA undertook the task of analysing the complaints laid against Dr Smuts, which he admitted, namely the following –

• clearing of funds from Kromelboog’s bank account;
• freezing of Kromelboog’s bank account;
• use of Kromelboog’s funds for legal fees;
• donation from Kromelboog to Landmark;
• invoicing for vague and ambiguous alleged services rendered; and
• seeking to takeover possession of Kromelboog’s operations.

The SCA held that the position of the director is that of trust as the director owes fiduciary duties to the company. It further confirmed that if a person commits serious misconduct of the sort described in Gihwala, that person must be declared a delinquent director and as held in Gihwala the court has no discretion in that regard. In consideration of the serious complaints put forward for Dr Smuts removal as a director and the grounds to be declared a delinquent director, it was held that the factors provided overwhelmingly showed that Dr Smuts conduct was in fact delinquent, which in turn justified the order to be declared a delinquent director in terms of s 162(5) of the Companies Act.

Conclusion

Therefore, it is prudent for directors to always act in the best interests of the company when dealing with the affairs of the company and not breach their fiduciary duties. The certainty and predictability of the law are best captured in the court’s brief yet legally poetic statement that it ‘has no discretion but to declare a person to be a delinquent director’ if fiduciary duties are breached. There indeed is no discretion, the facts in this regard are in tandem with the immediate outcome thereof.

Where a director’s overreach extends far beyond the defining lines of their allowance in the ‘cookie-jar’, the time is ripe for directors to take heed, understand their fiduciary duties and act accordingly as the law will not be remiss in the exercise of informing the need for accountability.

Uzukhanye Myoywana LLB (UWC) is a a candidate legal practitioner at MRT Law.

This article was first published in De Rebus in 2025 (March) DR 53.