Brief Summary

Companies — Delinquent directors — Application in terms of s 162 of the Companies Act 71 of 2008 to declare the third respondent a delinquent director — Allegations of gross negligence, wilful misconduct, and breach of trust in relation to the management of Skyport Corporation Limited — Evidence of mismanagement, commercial insolvency, and unauthorized personal withdrawals from the company’s accounts — Third respondent's admissions regarding the company's financial state and lack of proper accounting systems — Court held that the third respondent's conduct amounted to gross negligence and wilful misconduct, warranting a declaration of delinquency.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings took the form of an application brought in the High Court under section 162 of the Companies Act 71 of 2008 for an order declaring the third respondent a delinquent director. The applicant was the Companies and Intellectual Property Commission. The respondents were Ronald Steven Michael Cresswell (first respondent), Pierre Basson (second respondent), and Owen Wienand (third respondent), all associated with Skyport Corporation Limited (in liquidation).

The matter arose against the backdrop of an earlier statutory investigation into Skyport’s affairs. During April 2008 and October 2009, inspectors were appointed by the Minister of Trade and Industry under provisions of the Companies Act 61 of 1973 to investigate Skyport and related entities from incorporation. The judgment records that the applicant’s deponent, Ms van Zyl, was herself one of the inspectors and deposed to the founding affidavit with knowledge derived from that process and the information obtained.

Although the respondents initially raised constitutional objections, these were abandoned during oral argument. The litigation ultimately centred on whether the applicant had made out a proper case on the papers for delinquency under section 162, including whether reliance on investigative material was permissible and whether the third respondent’s conduct met the statutory threshold.

The general subject matter concerned the governance and financial administration of a public company that presented itself as pursuing a major airport development project, raised funds (notably via the sale of shares), and later became insolvent, with allegations that directors failed to meet basic standards of accountability and fiduciary governance, and that company monies were paid into the third respondent’s personal bank account without satisfactory explanation.

2. Material Facts

The court’s factual platform was drawn primarily from facts that were either common cause, admitted, or not meaningfully disputed by the third respondent in his answering affidavit.

It was common cause that Skyport, during 2007 and 2008, created an impression through public statements (including on its website and in media reporting) that it had commenced business, purchased land for approximately R140 million, and intended to erect an international airport at a projected cost of R1 billion by 2010. It also claimed to have applied to the Civil Aviation Authority for an airport licence, and the Civil Aviation Authority later indicated it had no knowledge of such an application and had not granted a licence. The third respondent accepted that the Civil Aviation Authority had informed Skyport that it did not grant Skyport’s licence.

The inspectors’ investigation (and the applicant’s case as presented) described the company’s share structure and fundraising practices. Skyport began with a founding share capital of 1 000 shares, later converted into 3 billion shares, with 20 million made available for a first phase of public uptake. Skyport transferred 10 million shares to a brokerage firm, Blue Chip Equity, at R1.75 per share, and it appeared that R17.5 million was not actually received from that brokerage. A newsletter invited shareholders to a once-off special offer to purchase additional shares, and there were divergent accounts from other directors as to whether shares were sold directly to the public or via brokerage firms. The third respondent’s answering affidavit did not materially engage with several of these detailed allegations, often asserting an inability to respond due to lack of detail or his absence from interviews.

On the company’s financial condition and operations, the third respondent admitted that Skyport never generated its own revenue, and that its only source of income was the sale of shares, which was used to pay directors’ salaries and operational expenses. He also accepted that the company had no meaningful assets and that its funds had been consumed in trying to obtain the required licence, acknowledging there was only R600 in Skyport’s Absa bank account at a relevant time. The court treated these admissions as supporting the applicant’s contention that Skyport was, in effect, operating in circumstances of commercial insolvency while continuing to conduct business.

On governance and recordkeeping, the third respondent accepted that the lack of a proper accounting system was a main reason for the inability to account for the utilisation and flow of funds. He expressly stated that he made no excuse for the failure to implement a proper accounting system, while indicating that he had realised the shortcomings and was in the process of rectifying them.

A key factual feature was that amounts ranging from small payments to larger sums, including an amount of R159 000, were paid from Skyport’s bank account into the third respondent’s personal bank account. The third respondent confirmed that payments were made into his personal account. His response was that, when questioned years later, he could not provide an explanation and believed the payments were due to him because (as he put it) he would have been asked about them if they were not due.

The court also recorded that Skyport was a public company, that members of the public purchased Skyport shares, and that the company held itself out as undertaking an airport project which, given the absence of a licence, could not be realised. These circumstances, coupled with the admitted deficiencies in accounting and the flow of funds into the third respondent’s personal account, formed the core factual basis relied upon in determining delinquency.

3. Legal Issues

The central legal questions were whether the third respondent’s conduct, assessed against the statutory standard in section 162(5)(c)(iv)(aa) of the Companies Act 71 of 2008, amounted to gross negligence, wilful misconduct, or breach of trust in relation to his functions and duties as a director, thereby requiring the court to declare him delinquent.

The dispute was primarily an application of law to facts, with important subsidiary questions involving procedural and evidential sufficiency on motion proceedings. In particular, the court had to determine whether the applicant had pleaded and supported its case adequately in the founding papers, and whether the court could properly have regard to material associated with the inspectors’ investigation, especially in circumstances where the third respondent challenged aspects as hearsay or criticised reliance on annexed documentation.

A further issue concerned the duration and form of any delinquency order. The founding affidavit contained language suggesting the respondents should never again be allowed to act as directors. The third respondent argued that a lifetime delinquency order would require reliance on section 162(5)(a) or section 162(5)(b), and that the applicant had not made out such a case. The court therefore had to address whether it could nonetheless grant relief under section 162(5)(c) (with its time-bound consequences) notwithstanding the breadth of the relief initially framed.

Constitutional objections based on retrospectivity were initially raised but were ultimately not decided, as they were abandoned during oral argument.

4. Court’s Reasoning

The court approached the matter by first identifying the statutory framework and the applicable standard under section 162(5)(c)(iv)(aa). It accepted that the concept of delinquency was a feature of the 2008 Act, while the content of concepts such as gross negligence and wilful misconduct had been developed in prior case law. The court drew, via the judgment in Msimang NO and Others v Katulina and Others 2013 (1) All SA 580 (GSJ), on authorities explaining that gross negligence involves an extreme departure from the reasonable-person standard, amounting to complete obtuseness of mind where risk-taking is conscious, or a total failure to take care where it is not. For wilful misconduct, the court adopted the understanding that it goes beyond negligence (including gross negligence) and involves conduct known to be wrong and pursued regardless of consequences.

In evaluating whether the applicant had made out its case on the papers, the court considered the third respondent’s reliance on the principle in Swissborough Diamond Mines (Pty) Ltd v Government of the Republic of South Africa 1999 (2) SA 279 (T), namely that litigants must do more than annex documents and request the court to trawl through them. The court, however, treated this matter as capable of determination by focusing on what the third respondent admitted or failed to answer substantively in his answering affidavit, and by recognising that Ms van Zyl’s affidavit was based not only on reports but also on her direct involvement as an inspector.

A major component of the reasoning was the court’s use of the concessions and non-denials in the answering affidavit. The third respondent’s inability to account for substantial payments (including R159 000) from the company’s bank account to his personal account was treated as significant, particularly because the explanation would lie within his own knowledge. The court rejected the notion that the mere passage of time could exculpate a director from providing a meaningful explanation for such transfers. It also considered the admitted absence of a proper accounting system and the admissions that Skyport’s income derived from the sale of shares used to pay salaries and operating expenses, with no operational revenue generated.

The court further reasoned that directors of a public company owe responsibilities not only to the company internally but also to the broader set of stakeholders referenced in the judgment, including investors and the public, in a manner that requires transparency and accountability. It concluded that such accountability was undermined by the third respondent’s admitted conduct and the company’s governance failures.

A distinct evaluative aspect of the court’s reasoning concerned how to assess “gross negligence.” It cautioned against examining each alleged failure in isolation and instead adopted a holistic assessment of the director’s performance. Against that approach, the court found that the conduct went beyond ordinary negligence. In the court’s assessment, it was grossly negligent for a director to allow the company to continue operating in an insolvent and parlous condition, to allow company funds to be used to pay directors’ fees in these circumstances, to continue in the face of knowledge that the Civil Aviation Authority would not grant the necessary licence central to the company’s business proposition, and to allow a public company to operate without proper accounting systems.

On the argument concerning the inspectors’ material and the seriousness of consequences, the court accepted that section 162 proceedings were civil in nature. It noted the reliance by the respondent on constitutional protections in relation to enquiries and possible criminal exposure, but it found that, on the papers, there was a clear denial that criminal proceedings were being pursued, and it treated the matter as falling within civil-litigation principles, referencing Bernstein and Others v Bester and Others NNO 1996 (2) SA 750 (CC) in response to the respondent’s broader challenge.

Finally, on the scope of relief, the court accepted that the founding affidavit’s request for a perpetual ban “went too far” given the structure of section 162. It agreed that a lifetime delinquency order would require reliance on section 162(5)(a) or (b), which were not pleaded. Nonetheless, it held that this overreach did not prevent the court from granting appropriate relief under section 162(5)(c) on the same factual matrix. The court treated the third respondent as having come to court to oppose delinquency in substance, and it concluded that the applicant had established delinquency grounded, at the least, in gross negligence.

5. Outcome and Relief

The court granted the application against the third respondent. It declared the third respondent delinquent in terms of section 162(5)(c)(iv)(aa) for a period of seven years.

The third respondent was ordered to pay the applicant’s costs of the application, including the costs of two counsel. The costs order also included the costs occasioned by the postponement on 16 November 2016.

Cases Cited

Msimang NO and Others v Katulina and Others 2013 (1) All SA 580 (GSJ)

Transnet Ltd t/a Portnet v Owners of the MV “Stella Tingas” and Another 2003 (2) SA 473 (SCA)

S v Dhlamini 1988 (2) SA 302 (A)

Philotex (Pty) Ltd and Others; Braitex (Pty) Ltd and Others v Snyman and Others [1997] ZASCA 92; 1998 (2) SA 138 (SCA)

S v Van As 1976 (2) SA 921 (A)

S v Van Zyl 1969 (1) SA 553 (A)

Rustenburg Platinum Mines Ltd v South African Airways and Pan American World Airways Inc 1977 (1) Lloyd’s Rep 564 (QB (Com Ct))

KLM Royal Dutch Airlines v Hamman 2002 (2) SA 818 (W)

Cape Empowerment Trust Limited v Druker and Others [2016] JOL 36987 (WCC)

Swissborough Diamond Mines (Pty) Ltd v Government of the Republic of South Africa 1999 (2) SA 279 (T)

Bernstein and Others v Bester and Others NNO 1996 (2) SA 750 (CC)

Ferreira v Levin NO; Vryenhoek v Powell NO 1996 (1) SA 984 (CC)

Legislation Cited

Companies Act 71 of 2008, section 162 and section 69

Companies Act 61 of 1973, sections 258, 259, 417 and 418

Close Corporations Act 69 of 1984, section 47

Constitution of the Republic of South Africa, 1996, section 22

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that, on the admissions and concessions made by the third respondent and the uncontested aspects of the factual matrix, the third respondent’s conduct as a director of a public company satisfied the statutory threshold in section 162(5)(c)(iv)(aa) for delinquency, at least on the basis of gross negligence. The court held that it was appropriate to assess the director’s conduct holistically and that the cumulative failures in governance, accounting, and the handling of company funds justified a delinquency declaration.

The court further held that, although the founding papers sought an overly extreme form of relief suggestive of a perpetual ban, this did not prevent the court from granting a time-bound delinquency order under section 162(5)(c) on the established facts.

LEGAL PRINCIPLES

The judgment applied the principle that gross negligence requires an extreme departure from the reasonable-person standard, potentially described as complete obtuseness of mind where risk-taking is conscious, or a total failure to take care where it is not, as articulated in the authorities discussed in Msimang NO and Others v Katulina and Others 2013 (1) All SA 580 (GSJ), including Transnet Ltd t/a Portnet v Owners of the MV “Stella Tingas” and Another 2003 (2) SA 473 (SCA).

It applied the principle that wilful misconduct goes materially beyond negligence, including gross negligence, and involves conduct the actor knows to be wrong and persists in regardless of consequences, consistent with Rustenburg Platinum Mines Ltd v South African Airways and Pan American World Airways Inc 1977 (1) Lloyd’s Rep 564 (QB (Com Ct)) as endorsed in KLM Royal Dutch Airlines v Hamman 2002 (2) SA 818 (W).

The court applied a further evaluative principle that, when determining delinquency under section 162, a court should not compartmentalise individual allegations but should assess the director’s conduct holistically, considering the cumulative effect of the director’s performance and omissions in the context of the company’s condition and obligations.

The judgment also applied the motion-proceedings principle, associated with Swissborough Diamond Mines (Pty) Ltd v Government of the Republic of South Africa 1999 (2) SA 279 (T), that litigants must identify the evidential material on which reliance is placed, while concluding on the facts of this case that sufficient material existed—particularly through admissions in the answering affidavit—to decide the delinquency question.

Finally, the judgment applied section 162’s structural distinction regarding duration of delinquency orders, accepting that a lifetime delinquency order is linked in the statute to circumstances under section 162(5)(a) or (b), but holding that an order under section 162(5)(c) could properly be granted for a limited period notwithstanding the breadth of relief initially sought.

Companies and Intellectual Property Commission v Cresswell and Others (21092/2015) [2017] ZAWCHC 38 (27 March 2017)