Companies Act of 2008

Auditing and Internal Control 2023

Learning Unit 3 (Week 1 – Lecture)

Section 1: Definitions

In many instances, directors are EXPECTED to

have knowledge about a variety of issues
affecting the company. This expectation is
defined in section 1. Directors cannot plead
ignorance!

“Knowing” “Knowingly” or “Knows”

A person had:
a) Actual knowledge of that matter;
b) Was in a position to have:
• Had the knowledge;
• Investigated the matter to get the knowledge
• Taken measures that would reasonably be
expected to acquire the knowledge

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Section 1: Definitions

For all sections in the Act, a “director” is

defined as follows:

Director includes:
• Prescribed officer
• Person who is a member of a committee of
the board, or of the audit committee of a
company

NB: They need not be members of the

board itself

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Section 69: Ineligibility and disqualification to be director or
prescribed officer
This section deals with persons who are
disallowed from being directors!
How do we deal with a disallowed person?
• A disqualified or ineligible person must not be
elected or appointed as director
• Also cannot act as a director (meaning they must
never do duties of a director)
• A company must not allow a disqualified person to
be appointed or act as a director (responsibility lies
with the company)
• A person who becomes disqualified while in office
must cease/stop being a director immediately

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Section 69: Ineligibility and disqualification to be director or
prescribed officer
How long does this disqualification last?
Is it a lifetime punishment?
• Disqualification may lapse upon
completion of [jail] sentence or after 5
years
• The court may extend the disqualification
to beyond the above periods
• The court may extend the disqualification
but not for longer than five years at a time.

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Section 69: Ineligibility and disqualification to be director or
prescribed officer
Which persons are disallowed?
1. A juristic person (legal persons are not
allowed to be directors, only natural
persons are allowed).
2. Unrehabilitated insolvent (a person who
previously failed to manage their own
financial affairs and has still not
recovered)
3. An unemancipated minor (a minor who is
still dependent financially and who is not
mature enough to make big decisions on
their own)
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Section 69: Ineligibility and disqualification to be director or
prescribed officer
Which persons are disallowed?
4. Prohibited by court (a person who the
court ordered specifically not to be a
director)
5. A person who has been placed under
probation by court should not be appointed
or act as a director
6. A person not meeting conditions set in the
MOI. The MOI may impose additional
grounds for disqualification and directors
must meet the minimum qualification criteria

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Section 69: Ineligibility and disqualification to be director or
prescribed officer
Which persons are disallowed?
7. Person prohibited by public regulation
8. Has been removed from an office of
trust on grounds of misconduct involving
dishonesty
9. Convicted without option of a fine for
theft, fraud, forgery, perjury or an
offence fraud, dishonesty or
misrepresentation
10. Convicted for forming a company whilst
disqualified

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Section 69: Ineligibility and disqualification to be director or
prescribed officer

Which persons are disallowed?

11. Convicted under :
• The Insolvency Act
• Close Corporations Act
• Competition Act
• Financial Intelligence Act
• Prevention and Combating of Corruption
Activities Act

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Section 69: Ineligibility and disqualification to be director or
prescribed officer

Exceptions:
• A disqualified person may be a director if:

• He owns 100% of the shares; or

• Other shareholders are related to

him/her and they agree that he may act
as a director

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Section 69: Ineligibility and disqualification to be director or
prescribed officer
• The Companies and Intellectual Property
Commission (CIPC) must establish and
maintain a public register of disqualified
persons
The CIPC deals with company registrations
and maintains databases of company names
and people who are directors in companies

It is important to have a list of disqualified

persons so that a company can check to see
if the person they want to appoint as a
director is not disqualified

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Section 69: Ineligibility and disqualification to be director or
prescribed officer
New Words
Basic Principle
• Ineligibility
This section deals with • Unemancipated minor
persons who are • Juristic person
• Perjury
disallowed from being • Companies and Intellectual
directors Property Commission (CIPC)
You need to know and understand
these words
NB: This is not an exhaustive list

# of disqualified persons Exceptions Disqualification period

• Completion of the sentence or
11 2 • 5 years

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Section 75: Director’s Financial Interest

This section deals with scenarios where

a director has a personal financial
interest * in a contract of a company.

Consider the following example:

Company A (Pty) Ltd wants to build a new
factory building. One of the Executive Directors
is Mrs Dlamini. Build-Me (Pty) Ltd is one of the
construction companies which offered to build
for Company A. One of the shareholders of
Build-Me is Mrs Dlamini’s younger sister
* Personal financial interest: means a direct material interest of
that person, of a financial, monetary or economic nature, or to
which a monetary value may be attributed

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Section 75: Director’s Financial Interest

A director may not:

• Enter into an agreement in which he or a
related person has financial interest;
• Participate in an agreement in which he or
related person has a financial interest

NB: Shareholders’ ordinary resolution*

may override the rules mentioned above.

* Ordinary resolution: a decision taken at a shareholders

meeting, with the support of more than 50% of the voting rights
exercised on the resolution

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Section 75: Director’s Financial Interest

When a director or related person has

financial interest in the contract he must:
a)Disclose interest and general nature
before it is considered (eg. The director
must disclose that one of the offering
companies is owned by his / her sister);
b) Disclose any material information
relating the matter know to him (eg. If the
director knows that his sister’s company’s
BEE certificate is fake, he is obliged to
inform the other directors)
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Section 75: Director’s Financial Interest

c) Disclose observations and pertinent

insights if requested to do so by other
directors
d) Leave the meeting immediately after
disclosing the above (the director who has
a financial interest is not allowed to
participate in the meeting….)
e) Must not take part in consideration of
the matter (…or in any part of the process
of considering who to award the contract)

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Section 75: Director’s Financial Interest

f) Must not execute any document on

behalf of the company in relation to the
matter (cannot handle any paperwork
whatsoever relating to a contract in which
he / she has a financial interest)

Before we look at the next requirement, let us

discuss the issue of a “quorum”. Does anyone
know what is a quorum? Please use your
devices to google the definition…

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Section 75: Director’s Financial Interest

g) When the director leaves the meeting as a

result of having an interest in a matter being
considered, he/she must be:
• Regarded as being present in determining
whether sufficient number of directors was
present to constitute a meeting (quorum * for
a meeting to be regarded as valid); and
• Regarded as present for the purpose of
determining support of resolutions taken
(quorum for a decision in a meeting to be
regarded as valid)
* Quorum: minimum number of people required at the start of a
meeting to consider a meeting to be valid

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Section 75: Director’s Financial Interest

• The director may at any time send a

notification to the Board notifying
them of the nature and extent of
financial interest in a matter or decision

• The notice must be kept and maybe

replaced by the director should his/her
financial interest change or cease to
exist

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Section 75: Director’s Financial Interest

Exceptions
The section does not apply to:
1. A company whose director is a 100%
shareholder and he is the only director .
Effectively there is no real “conflict of
interest” as the company and the individual
are one and the same
2. A director in respect of a decision which may
generally affect all directors in their capacity
as directors (eg. decision on directors’
bonuses)
3. A decision to remove the director from office

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Section 75: Director’s Financial Interest

• The decision taken by the Board is valid

despite personal financial interest if it:
• Was approved according to the
requirements of this section
• Was ratified by an ordinary
resolution of the shareholders

• NB: Court may declare a decision valid

despite failure to declare personal
financial interest (ie. The court can rule
that an invalid decision must be treated as
valid)
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Section 75: Director’s Financial Interest

Basic Principle # of Steps

Director may NOT enter or
participate in a contract 7
(# of steps to follow if a personal
(personal financial interest) financial interest exists)

New Words

• Personal financial interest

Override Rule • Ordinary resolution
Exceptions • Quorum
Interest can be overridden by a • Ratify
SHAREHOLDER’s ordinary
resolution (NOT a director’s 3 You need to know and understand
these words
(# of EXCEPTIONS to the rule) NB: This is not an exhaustive list
special resolution)

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QUESTIONS?