Date: 06 August 2020 By: Anton van Zyl
In one of the first cases of its kind to be heard in the Limpopo High Court, a director of a well-known security company has been declared a delinquent director. This effectively means that the court found that the person is not fit to serve as a director of any company.
The case stems from a dispute between the two directors of a security company, DRS Thohoyandou (Pty) Ltd. The company was started by Ronald Walter Sparrow (Ron) and Dion Svoboda and operated mainly in the Thohoyandou, Giyani, and Malamulele area. Svoboda seemingly provided the start-up capital, but Sparrow oversaw the operational part of the business.
According to court papers, Sparrow extended the business to the Kremetart Residential Community in Giyani in July 2018, and 74 families signed on. Alarm systems were installed at the houses and the residents started paying their monthly fees. The only snag was that the money was not paid into the company’s bank account. Instead, Sparrow supplied his own personal bank account number where money was to be deposited. Residents also did not receive receipts from the company but were requested to send proof of payment to “an Indian spaza shop” (as is indicated in court papers).
When Svoboda found out about the arrangements, he was justifiably upset. Sparrow’s bank account was also used to pay for his personal expenses, and even his credit-card instalments and monthly loan repayments were deducted from this account. The company did not, however, transfer the money owed to Svoboda.
In court, Sparrow argued that he had used his own bank account as a type of “trust account” and he had had the intention to pay any profits into the company’s bank account. He told the court that he had asked Svoboda on numerous occasions to buy vehicles and equipment for the business, but these requests “fell on deaf ears”. Sparrow tried to convince the court that the company was experiencing serious cash-flow problems and he had to do something to ensure that the company met its obligations to its clients.
One crucial error that Sparrow seemed to have made was to keep all this information from his business partner and co-director. “I know if I were to tell him of the ‘plan’ he would not have agreed to it,” he stated in his answering affidavit.
When the facts eventually emerged, Sparrow was suspended by DRS Thohoyandou on 11 December 2018. The two were at loggerheads and the relationship of trust that should exist between directors was clearly gone. Svoboda then turned to the court to have his former partner declared a delinquent director.
More than a year went by before the case was heard, but in January this year, judge EM Makgoba ruled in favour of Svoboda and declared Sparrow a delinquent director. “(Sparrow’s) conduct falls short of the standard expected of a director … to such an extent that it amounts to wilful misconduct, breach of trust, and a gross abuse of his position as a director,” Makgoba said.
The judge emphasized the responsibilities that the Companies Act places on directors. These responsibilities include that a director should always act in the best interests of the company and may not act in self-interest. Directors must communicate properly and may not withhold important information from co-directors. If a court finds that a director has grossly abused his position and takes personal advantage of information or opportunities in the company, such a director must be declared a delinquent director.
Makgoba pointed out that Sparrow had knowingly acted without having the authority to do so. He regarded the action of Sparrow to have the money paid into his personal bank account as wilful misconduct and a breach of trust.
Even though the relationship between the two directors was strained, Makgoba said Sparrow was nevertheless legally bound as a director “to discharge his duties in the same manner had the relationship between them been normal”. He said even if Svoboda had also acted in dereliction of his duties (which was denied), this did not absolve Sparrow from carrying out his duties.
“The effect of a declaration of a person as a delinquent director is that he is thereupon disqualified, for so long as the declaration remains in force, from being a director of any company,” Makgoba explained.
Sparrow’s attempt to fight back and file a counter-application to have the company liquidated did not work either. The judge reckoned the solution would not be to wind up the company; he was of the opinion the individual wrongdoers should be acted against. “The effective remedy in the circumstances is therefore a delinquency order and not a winding-up order,” he said.
Sparrow was ordered to pay the cost of the application on a scale as between attorney and client.
The order of Judge Makgoba went on appeal but was first denied by the Limpopo High Court on 11 February 2020. Sparrow’s legal team then appealed directly to the Supreme Court of Appeal, but this appeal was also turned down on 14 July.
Anton van Zyl has been with the Zoutpansberger and Limpopo Mirror since 1990. He graduated from the Rand Afrikaans University (now University of Johannesburg) and obtained a BA Communications degree. He is a founder member of the Association of Independent Publishers.