The directors of a company are required to perform their duties in compliance with the Companies Act 71 of 2008, failing which they may incur personal liability. In addition to the Companies Act, directors of listed companies must ensure that they also comply with the relevant securities exchange listings requirements, such as the JSE Listings Requirements. In the recent case of Munro v Johannesburg Stock Exchange, the Financial Services Tribunal addressed key issues relating to penalties imposed on directors of listed companies.
Following revelations of continued financial impropriety, the Johannesburg Stock Exchange (“JSE”) fined former Tongaat Hulett CFO, Murray Munro (the “Applicant”) R6 million, and disqualified him from holding the office of director of a listed company for ten years.
The JSE found that the Applicant had contravened paragraphs 8.5.7(a) and 8.6.2(b) and General Principles (v) and (vii) of the Listings Requirements, which require the annual financial statements and interim reports of a listed company to be prepared in compliance with internationally accepted accounting standards.
The Applicant approached the Tribunal for reconsideration of the JSE’s ruling. Key to the defence raised by the Applicant was the question of fault. Firstly, the Applicant argued that if the JSE seeks to impose a penalty on a director in terms of the Listings Requirements, it must, as a point of departure, establish fault on the part of that director. The Applicant also claimed that the mere existence of misstatements in the financial statements did not automatically mean he was at fault; and that without first establishing fault, the JSE could not impose a penalty against him.
In rejecting this argument, the Tribunal differentiated between a penal statue (which requires fault) and a regulatory one. The Tribunal relied on its ruling in Abdulla v JSE Ltd and Andre Visser, where it held that –
‘...the sanctions imposed by the JSE serve regulatory rather than penal purposes. Thus, the element of fault is not to be imported into or implied where the Listings Requirements do not require this.’
Put simply, if the JSE determines that a director has contravened or failed to adhere to the Listings Requirements, regardless of fault (whether in the form of intention or negligence), the JSE is entitled to impose a penalty on that director.
The Applicant also relied on sections 76(5) (a) and (b) of the Companies Act, which entitle a director to rely on information provided to them by –
- ‘one or more employees of the company whom the director reasonably believes to be reliable and competent in the functions performed or the information, opinions, reports or statements provided’;
- legal counsel, accountants, or other professional persons retained by the company, the board or a committee as to matters involving skills or expertise that the director reasonably believes are matters—
- within the particular person’s professional or expert competence; or
- as to which the particular person merits confidence’
These provisions allow a director to rely on information provided by others – for example in this case, other accountants reporting to the Applicant – in the performance of director duties.
While the Applicant conceded that the preparation of financial statements takes place under the supervision of the CFO, he argued that he had not personally processed the entries, and that a director should be able to rely on information provided to them by other employees of the company without being liable for misstatements.
The Tribunal rejected this argument. It found that the Applicant had not only been a central figure in the preparation of the financial statements, but that a delegation of duties, as set out in section 76(5) of the Companies Act, does not absolve a director from his duties under the Listings Requirements.
The Tribunal referred to Schedule 13 of the Listings Requirements, containing declarations that all directors of listed companies are required to make, including the following:
‘The delegation of any of my duties to any sub-committee or anyone else will not absolve me of my duties and responsibilities in terms of the Listings Requirements.’
The Tribunal held that to establish liability for a penalty, what is required is an objective interpretation of whether or not there has been a contravention of the Listings Requirements. There is no requirement to establish fault on the part of the director. Therefore, the Applicant was found to be liable for contravening both paragraphs 8.5.7(a) and 8.6.2(b), as the preparation of accurate financial statements fell squarely within the purview of his duties.
This ruling is an important reminder for directors to always perform their duties dutifully and with the necessary care and skill. Failure to do so may result in censure, disqualification as a director or a fine by the JSE. In some instances, a director may be liable for a penalty even without the element of fault being present.
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Read the original publication at Fasken
