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August 15, 2012

Director disputes – A new remedy to the rescue

Directors behaving badly

You are a director of a company and discover that your fellow director is acting against the company’s best interests. You want the company to sue him/her to recover the company’s losses, but naturally your fellow director isn’t going to agree to that – what can you do about it?

Directors, shareholders and employees need to know of an important new remedy introduced by the new Companies Act. In a nutshell, it allows for directors and other interested parties to litigate in the name of the company for any such claims, without a board resolution, after giving the company notice and an opportunity to investigate your allegations.

The court will only allow you to sue in the company’s name if satisfied that:

1. You are acting in good faith, and

2. There is a “serious question of material consequence to the company” at stake, and

3. The proposed litigation is in the best interests of the company.

The feuding brothers – Court to the rescue

In a recent High Court case, the only two directors of a company were brothers involved in a long-term personal feud, and one director believed that the other had grossly abused his credit card facility (to the tune of over R1.1m).

The other director denied this, claiming that the debits were rightfully incurred by him as a director, and that his brother was acting not in good faith but rather with an “ulterior motive occasioned by the animosity which exists between them”.

On the facts the Court disagreed, finding that the applicant director was indeed acting in good faith and in the interests of the company, and therefore authorising him to institute action against his brother in the company’s name.

Note: If you are faced with a similar situation, take proper advice before acting – the procedures prescribed in the Act need to be followed closely.

© DotNews, 2005-2012. This newsletter is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.

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