Directors appealing removal by the board - your 20 days starts now

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The date on which the 20 days starts running, however, is not clearly set out in the Act. The High Court, in the case of Peter v Mimosa Court Shareblock RF (Pty) Ltd 2024, has now shed some light on this issue.

Applied to have decision reviewed

René Peter (the applicant) was a director of Mimosa Court Shareblock RF (Pty) Ltd (the company) until he was removed by way of board resolution in terms of section 71(3) on grounds that he was derelict in the performance of his duties and that his conduct was unethical and dishonest.

He applied to court to have the decision taken by the board reviewed in terms of section 71(5) of the Act which allows a director who has been removed in terms of section 71(3) to apply to court within 20 business days to review the determination of the board.

While the applicant alleged that the application was brought timeously, the respondents argued that the application was brought outside of the 20 business day period. The case therefore turned on establishing when the 20 business days commenced.

Arguments

The applicant submitted that a purposive approach should be followed in the interpretation of section 71(5) and argued that formal knowledge, ie. receipt of the board's resolution and transcripts of the board's deliberations or record of the meeting, was required for the 20 business days to commence because, so it was argued, if the applicant is unaware of the outcome or determination of the meeting, then he would not know whether to take the decision on review or not.

The applicant averred that he only obtained formal knowledge several days after resolution had been passed. On this basis, the applicant argued that the application was launched within 20 business days of his formal knowledge of the decision of the board being taken, and thus launched timeously.

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The respondents, on the other hand, argued that the application was launched outside of the 20-business day period, which, they averred, commenced on the day that the resolution was passed. In other words, the 20-business day period commenced on the day the board meeting was held and the applicant’s removal resolved. The respondents argued that as the Act does not allow for condonation, the application should fail.

A purposive approach to the interpretation of section 71(5)

While the court was amenable to exploring a purposive approach to the interpretation of section 71(5) by looking at the purpose of the Act and the Bill of Rights, it emphasised that a purposive approach had to remain faithful to the language of the statute.

Purpose of the Act

Section 7 of the Act notes that the purpose thereof is, amongst others, to promote compliance with the Bill of Rights in the field of company law and to ensure that company law is included in the constitutional framework.

Bill of Rights

The court noted in light of the fact that the Act does not specify the moment the 20 business days commences, and the fact that the Act does not provide for the court on its own accord to condone non-compliance with the time period, an applicant's constitutional right entrenched in section 34 of the Bill of Rights, namely that “[e]veryone has the right to have any dispute that can be resolved by the application of law decided in a fair public hearing before a court or, where appropriate, another independent and impartial tribunal or forum”, could be infringed if the applicant was not aware of the decision of the board.

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Interpretation of section 71(5) read together with section 5(3)

In its interpretation of the language of section 71(5), the court noted that the wording of the section clearly states that once the board has determined in terms of section 71(3) that a director is ineligible or disqualified or, inter alia, negligent or derelict, the director concerned may apply within 20 business days to a court to review the determination.

The word “determine” the court added, means to come to a decision. Therefore, the trigger event for the commencement of the 20-business day period is the date on which the decision of the board is reached, in this case the removal of the applicant as director of the company.

The court then referred to section 5(3) of the Act read together with section 1 thereof which requires the first day to be excluded and the last day to be included when calculating a particular time period.

Decision of the court

Taking into account the language of section 71(5) read together with section 5(3) of the Act, while remaining mindful of the purpose of the Act and considering the potential infringement of section 34 of the Bill of Rights if the applicant was unaware of the decision of the board, the court held that ordinarily, the commencement of the 20 business day period is triggered by the decision of the board and commences the day after the decision of the board is reached.

However, where it can be shown that the applicant had no knowledge of the decision of the board, it could be argued that actual knowledge rather than formal knowledge of such decision would, instead, trigger the commencement of the 20-business day period.

In light of the applicant’s argument about knowledge of the board’s decision, the court distinguished actual knowledge from formal knowledge, stating that actual knowledge occurs when the person becomes aware of the board's determination, whereas formal knowledge occurs when the affected party receives a copy of the resolution or transcripts of the board's deliberations.

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The court held that the applicant’s interpretation of section 71(5), ie. that formal knowledge triggers the 20 business day period, would lead to an absurdity and a potential abuse of the section 71(5) procedure. The court justified this position by holding that a section 71 review application could be launched in absence of a record or transcript of deliberations as the implicated party would have received notice of the meeting which contained an explanation of the meeting's purpose.

In this case, although the application was brought within 20 business days of the director concerned obtaining formal knowledge that the resolution was passed, it was brought outside 20 business days of the director obtaining actual knowledge thereof, which, the applicant admitted, was the day after the resolution was passed. On this basis, the court held that the applicant brought the application outside of the 20-business day period and, as such, his application was dismissed.

Importance of the judgment

From this judgment it is clear that while a purposive approach may be adopted to determine the date of commencement of the 20-business day period, when this time period has lapsed, the court cannot, on its own accord, condone such non-compliance, and as such and the decision of the board must stand. Non-compliance with the time period, therefore, creates a bar to legal remedy.

Boards of directors are, therefore, encouraged to notify the director concerned of their removal as soon as possible after the resolution has been passed so as to avoid any ambiguity as to the commencement of the 20-business day period.

Similarly, a director who receives a notice of a meeting calling for their removal is encouraged to contact a board member as soon as possible after the scheduled meeting to gain knowledge of the decision taken thereat, in order to make application for review of such decision timeously, should they wish to do so.

This is especially important because, as stated above, the 20-business day period is, ordinarily, triggered by the board's decision.