Gihwala and Others v Grancy Property Ltd and Others (20760/14) [2016] ZASCA 35 : [2016] 2 All SA 649 [2016] JOL 35573 (SCA) (24 March 2016) per Wallis JA (Lewis, Leach and Seriti JJA and Tsoka AJA concurring)

Excerpts without footnotes

Delinquency declarations

[127]    Mr Gihwala and Mr Manala were both declared delinquent directors in terms of s 162(5)(c) of the Companies Act 71 of 2008 which 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) … ’

[128]    Mr Gihwala challenged the delinquency order made against him, contending that it was based on an incorrect appreciation of the evidence, without specifying in what respects Fourie J erred.  This argument was without merit and counsel did not deal with it in oral argument.  For my part I agree with and endorse Fourie J’s findings in regard to the conduct of Mr Gihwala and Mr Manala and this judgment should not be read as in any way detracting from those findings.

[129]    In what follows I propose to refer to Mr Gihwala as the main actor because that appears to have been the situation in fact.  That does not excuse Mr Manala from responsibility for the misconduct that will be catalogued.  He owed the same fiduciary duty to SMI and to Grancy and was aware of what was being done in his name.  He was also a director of Ngatana and party to those matters concerning Ngatana.  He was equally responsible for what happened and must bear the same consequences.

. . . . .

[132]    The two loans contravened the provisions of s 226 of the 1973 Act.  They caused loss to SMI because it has not been able to recover them from Mr Manala.  At best that loss was undoubtedly due to gross negligence on the part of both Mr Gihwala and Mr Manala.  As I mentioned in the opening paragraph of this judgment Mr Gihwala is a businessman and attorney.  He was at the material time the chairman of one of South Africa’s largest firms of attorneys and the chairman of Redefine, one of the largest property loan stock companies listed on the JSE.  His failure to observe the requirements of s 226 was inexcusable.

. . . . .

[134]    This conduct falls squarely within s 162(5)(c) of the 2008 Act.  It involved gross abuses of the position of a director.  Grancy was excluded from the benefits of an investment, which it had substantially financed, while Mr Gihwala and Mr Manala took those benefits for themselves. . .

. . . . .

[139]    These actions caused harm to SMI.  It was in my view wilful misconduct on the part of Mr Gihwala and Mr Manala because it was entirely intentional and with knowledge of the obligations owed to Grancy under the investment agreement.  But at the very least it was gross negligence akin to recklessness.  It involved a breach of trust in relation to their performance of their duties as directors.  It was entirely inexcusable and ongoing as evidenced by their endeavours to avoid complying with their obligation to provide a proper accounting to Grancy in regard to its investment.  A declaration of delinquency was entirely justified.

Constitutional challenges

[140]    Realising that this was the case the argument on this issue centred on the challenge to the constitutionality of s 162(5).  This had two legs.

The first was that the entire section was unconstitutional because it was alleged to be retrospective in its operation.  The argument was based upon the fact that the events relied upon to justify the order occurred before the commencement of the Act on 1 May 2011.  By then Mr Gihwala had resigned as a director of SMI  and Mr Manala did so soon afterwards.

The second argument, while expressed in general terms, effectively attacked s 162(5)(c), as read with s 162(6)(b)(ii), alone.  It focused on the fact that there was no discretion vested in the court either to refuse to make a delinquency order if the requirements of s 162(5)(c) were satisfied, or to moderate the period of such order to a period of less than seven years.  No argument was addressed to the consequences of the absence of discretion in relation to the other sub-sections of s 162(5).  Whether they may be subject to constitutional attack is a matter that must await another day.

[141]    The first of these arguments fell away when counsel’s attention was drawn to the established principle of our law that a statute is not retrospective merely ‘because a part of the requisites for its action is drawn from time antecedent to its passing’.  The argument was then confined to the proposition that the absence of flexibility in regard to the imposition of delinquency had the potential to infringe the constitutional rights to dignity,  the right to choose a trade occupation or profession  and the right of access to courts.  In argument the focus fell on the right to dignity.

Right to dignity

[142]    In order to assess these arguments it is appropriate first to examine the purpose of s 162(5).  Contrary to the submissions on behalf of Mr Gihwala and Mr Manala it is not a penal provision.

Its purpose is to protect the investing public, whether sophisticated or unsophisticated, against the type of conduct that leads to an order of delinquency, and to protect those who deal with companies against the misconduct of delinquent directors.

What is that conduct?  It is helpful to examine some of the other provisions of the section.

Under subsec 5(a) consenting to serve as a director, or acting in that capacity or in a prescribed office, while ineligible or disqualified from doing so attracts delinquency.

Under subsec 5(b) acting as a director while under a probation order in terms of s 162, or the corresponding provision dealing with close corporations, results in delinquency as both orders are directed at preventing that very conduct.

[143]    Turning to subsec 5(c) one starts with a person who grossly abuses the position of director, conduct of which I have found Mr Gihwala and Mr Manala guilty.  We are not talking about a trivial misdemeanour or an unfortunate fall from grace.  Only gross abuses of the position of director qualify.

Next is taking personal advantage of information or opportunity available because of the person’s position as a director.

This hits two types of conduct.

  • The first, in one of its common forms, is insider trading, whereby a director makes use of information, known only because of their position as a director, for personal advantage or the advantage of others.
  • The second is where a director appropriates a business opportunity that should have accrued to the company.  Our law has deprecated that for over a century.
  • The third case is where the director has intentionally or by gross negligence inflicted harm upon the company or its subsidiary.
  • The fourth is where the director has been guilty of gross negligence, wilful misconduct or breach of trust in relation to the performance of the functions of director or acted in breach of s 77(3)(a) to (c).

That section makes a director liable for loss or damage sustained by the company in 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 …’

Gross negligence

[144]    All of these involve serious misconduct on the part of a director.  In the affidavits raising the constitutional issue there was a complaint that gross negligence could trigger a delinquency order.  There is no merit in this complaint.

There is a long history of courts treating gross negligence as the equivalent of recklessness, when dealing with the conduct of those responsible for the administration of companies, and recklessness is plainly serious misconduct.

It was urged upon us that there might be circumstances of extenuation, or perhaps that, notwithstanding the seriousness of the conduct, the company might not have suffered any loss.  But neither of those is relevant to the protective purpose of the section.  Its aim is to ensure that those who invest in companies, big or small, are protected against directors who engage in serious misconduct of the type described in these sections.  That is conduct that breaches the bond of trust that shareholders have in the people they appoint to the board of directors.

Directors who show themselves unworthy of that trust are declared delinquent and excluded from the office of director.  It protects those who deal with companies by seeking to ensure that the management of those companies is in fit hands.  And it is required in the public interest that those who enjoy the benefits of incorporation and limited liability should not abuse their position.

The exclusion is for a minimum period of seven years,  but the court has the power to relax that after three years and instead place the person under probation in terms of the section.  So there is power to relax the full effect of a declaration of delinquency once the delinquent has demonstrated that this is appropriate.  In addition the court may restrict the operation of the declaration of delinquency to one or more particular categories of company.  A director declared delinquent in relation to a financial services company may be permitted to be a director of an engineering firm.

Legislation must serve a rational purpose

[145]    It is noteworthy that the section was not attacked on the ground that it was irrational.  It is a requirement of our Constitution that all legislation must serve a rational purpose.  There must be a rational connection between the purpose of the legislation and the provision under consideration.

Section 162 passes that test.  Patently it is an appropriate and proportionate response by the legislature to the problem of delinquent directors and the harm they may cause to the public who place their trust in them.  We were referred to legislation in other countries where their legislatures have seen fit to vest their courts with a wider discretion in this regard.  But I fail to see why that should render the response of our legislature constitutionally problematic.  Rationality is the touchstone of legislative validity and s 162(5)(c), read with s 162(6)(b)(ii), is rational.

Right to choose their trade, occupation or profession freely

[146]    Section 22 of the Constitution provides:

‘Every citizen has the right to choose their trade, occupation or profession freely.  The practice of a trade, occupation or profession may be regulated by law.’

The background to the section was explained by the Constitutional Court in Affordable Medicines Trust.  In para 60 Ngcobo J said:

‘Limitations on the right to freely choose a profession are not to be lightly tolerated.  But we live in a modern and industrial world of human interdependence and mutual responsibility.  Indeed we are caught in an inescapable network of mutuality.  Provided it is in the public interest and not arbitrary or capricious, regulation of vocational activity for the protection both of the persons involved in it and of the community at large affected by it is to be both expected and welcomed.’

Even if it is assumed in favour of Mr Gihwala and Mr Manala that being a director of companies is an occupation, trade or profession, a proposition the correctness of which is by no means obvious, they did not suggest that s 162(5) is either capricious or arbitrary.  On that ground alone the constitutional challenge under this head must fail.

Fair hearing before a court

[147]    The challenge under s 34 was misconceived.  The court is involved at every stage of an enquiry under s 162(5).  It is the court that makes the findings on which a delinquency order rests.  It is the court that decides whether the period of delinquency should be greater than seven years or should be limited to particular categories of company and whether conditions should be attached to a delinquency order and, if so, their terms.

It is to the court that a delinquent director turns if they believe that the period of delinquency should be converted into one of probation.  The fact that a delinquency order of a specific duration follows upon the factual finding by a court that the director is delinquent is no different from any other provision that provides for a statutory consequence to follow upon a finding in judicial proceedings.

It is apparent therefore that before a declaration of delinquency is made the errant director has an entirely fair hearing before a court.  It is not the absence of a fair hearing that is in issue but the consequences of an adverse decision.  That consequence cannot be challenged under s 34 on the basis that the delinquent director has been deprived of a right of access to court.  It can only be challenged on the basis that it is an irrational legislative response to the particular problem, in this case that of directors’ delinquency.  It stands on the same footing as any statutory provision that disqualifies a person from pursuing a trade, occupation or profession in consequence of their disability or misconduct.  Countless examples of such disqualifications such as minority, insanity, insolvency, criminal conduct, other misconduct or absence of qualification are to be found in legislation.

Right to dignity

[148]    That leaves the challenge based on the right to dignity.  Central though that is in our constitutional dispensation,  it is difficult to see on what basis it is engaged in this case.  I stress that unlike Makwanyane and Dodo this case is not concerned with a sentence in criminal proceedings or a sanction for misconduct.  Makwanyane engaged the right to life in s 12 of the Constitution and Dodo the doctrine of the separation of powers, the right to be free from cruel, unusual or degrading punishment and the rights conferred on a criminal accused under s 35 of the Constitution.  None of those are relevant in this case.  It does not involve questions of the individualisation of punishment, but the appropriateness of the protective measures the legislature has prescribed to deal with delinquent directors.

Serious misconduct

[149]    It must be borne in mind that a delinquency order can only be made in consequence of serious misconduct on the part of a director.  It is that conduct that results in delinquency.  In the same way if an attorney is guilty of serious misconduct they will lose their right to practice as an attorney.  I find the suggestion surprising that the grant of a striking off order or an order suspending an attorney from practice infringes their right to dignity.  That ignores the fact that the commission of the misconduct is what leads to that result.  And it is the director or the attorney who is guilty of that misconduct.  The court investigates the conduct and if it is established by evidence the striking off or suspension or delinquency order is the necessary consequence.

Rationality of legislative decision

[150]    At the end of the day the argument under this head was reduced to saying that the terms of the statute do not permit the court to take into account the individual director’s circumstances and degree of blameworthiness.  But that is merely an attack on the legislative decision that a delinquency order in particular terms must follow from conduct of the type specified.

Such an attack can only be pursued by attacking the rationality of that legislative decision, and that case was not made.  It follows that Fourie J correctly rejected the attacks on the constitutionality of s 162 as a whole and that on s 162(5)(c), read with s 162(6)(b)(ii), separately.  The appeal against the delinquency orders must fail.