In a case that might resonate with anyone managing multiple interests or partnerships, the South African Supreme Court of Appeal recently delivered a judgment that businesses should heed. The matter involved Dr Boudewyn Smuts, a director who was declared delinquent under the Companies Act, a designation that bars individuals from serving as directors due to egregious misconduct. But what does this mean for your business, and how can you ensure your directors stay on course?
The facts of the case are striking. Dr Smuts, a nature conservationist, was the sole director of a farming company, Kromelboog Conservation Services, while also serving as a trustee for a nonprofit organisation, Landmark Foundation. The two entities were ostensibly connected through a joint venture promoting biodiversity in farming practices. However, conflicts arose when the lines between these roles blurred, with disastrous results for Kromelboog.
At the heart of the issue was Dr Smuts’ failure to act in the best interests of the company he directed. Instead of prioritising Kromelboog’s financial and operational health, he allegedly used its resources to advance his personal and nonprofit projects. This included transferring funds from Kromelboog’s bank account to the nonprofit without shareholder approval, invoicing the company for personal consultancy fees, and using company money to pay for legal disputes unrelated to the business’s benefit. These actions left Kromelboog financially strained and undermined trust among its stakeholders.
South African law sets a high standard for directors. Under Section 162 of the Companies Act, directors can be declared delinquent if they grossly abuse their position, act with negligence, or harm the company. The court in this case found that Dr Smuts’ conduct ticked all these boxes. By prioritising personal interests over those of the company, he failed in his fiduciary duty – a legal responsibility to act honestly, in good faith, and in the best interests of the company.
This judgment is a wake-up call for businesses, particularly those operating in sectors where partnerships and intertwined interests are common. It’s easy to see how directors can get caught up in advancing a personal vision or project, especially when the boundaries between roles are unclear. However, the law is unambiguous: a director’s loyalty must lie with the company they serve. Any deviation from this can result in severe consequences, including reputational damage, financial losses, and legal penalties.
For business owners and managers, this case underscores the importance of sound governance and clear role definitions. Directors should avoid conflicts of interest or, at the very least, disclose them transparently to shareholders. Financial controls are also critical. Whether it’s approving payments or authorising transactions, decisions should align with the company’s interests and be subject to appropriate oversight.
The judgment also serves as a reminder that legal obligations aren’t just formalities; they’re the foundation of trust between directors, shareholders, and stakeholders. A director’s role is one of stewardship, ensuring that the business operates ethically and profitably. When personal interests cloud this responsibility, the repercussions can be devastating.
Ultimately, this case is more than a cautionary tale about misconduct; it’s a lesson in the value of accountability and the importance of strong governance. As business leaders, we must ask ourselves: are we shepherding our companies with care, or are we straying off course? Ensuring your directors act in good faith isn’t just a legal necessity – it’s the key to building a business that’s trusted, resilient, and set for long-term success.
By Koos Benadie | Director
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