Smuts v Kromelboog Conservation Services (Pty) Ltd and Another

Dr Boudewyn Homburg De Vries Smuts was the sole director of Kromelboog Conservation Services (Pty) Ltd from 2015 until his removal on 7 July 2021. Kromelboog was owned by Tamarisk Trust, which leased four farms to Kromelboog for farming purposes. Dr Smuts was also a trustee of Landmark Foundation Trust, which managed the farms for Kromelboog under a management agreement to implement the Shepherding Back Biodiversity Project. Kromelboog operated at substantial losses exceeding R16 million, funded by shareholder loans from Tamarisk of approximately R27 million. A dispute arose between the parties in late 2020. Shortly before and after his removal as director, Dr Smuts engaged in various acts including: clearing R367,071.42 from Kromelboog's bank account minutes before the shareholders' meeting for his removal; freezing Kromelboog's bank account after his removal; causing Kromelboog to pay approximately R241,136.60 in legal fees for his own benefit; invoicing Kromelboog for consultancy fees totaling R159,410 without shareholder authorization; causing a R108,000 donation to Landmark without shareholder approval; and attempting to obtain possession of Kromelboog's vehicle registration documents and business operations for Landmark's benefit. He subsequently incorporated Shepherding Back Co (Pty) Ltd and attempted to transfer Kromelboog's operations to it and Landmark.

• Whether the conduct of Dr Smuts as a director justified a declaration of delinquency in terms of section 162(5)(c) of the Companies Act 71 of 2008
• Whether Dr Smuts grossly abused his position as director contrary to section 162(5)(c)(i)
• Whether Dr Smuts intentionally or by gross negligence inflicted harm on Kromelboog contrary to section 162(5)(c)(iii)
• Whether Dr Smuts' conduct amounted to gross negligence, wilful misconduct or breach of trust in terms of section 162(5)(c)(iv)
• Whether Dr Smuts breached his fiduciary duties and the standards of conduct required of directors under sections 75(3) and 76 of the Companies Act
• Whether transactions entered into by Dr Smuts where he had a personal financial interest without shareholder approval were unlawful

The appeal was dismissed with costs, including costs of two counsel where so employed. The High Court's order declaring Dr Smuts a delinquent director in terms of section 162(5) of the Companies Act 71 of 2008 was upheld.

A director grossly abuses their position and must be declared a delinquent director under section 162(5)(c) of the Companies Act where they: (1) act in circumstances of clear conflict of interest by prioritizing personal interests or interests of another entity over those of the company; (2) enter into transactions or approve payments where they have a personal financial interest without obtaining shareholder authorization as required by section 75(3); (3) intentionally or through gross negligence inflict harm on the company while it is in financial distress; (4) transfer company funds to entities in which they have personal interest; (5) use their position as director to benefit themselves or other entities; and (6) continue such conduct even after being informed of the conflict of interest. The duty of a director to act in the company's best interests and comply with fiduciary obligations under sections 75 and 76 is absolute and cannot be excused by external circumstances, alleged oral agreements, or objectives pursued for other entities. Section 75(2)'s exclusion from disclosure requirements regarding proposals to remove a director does not exempt the director from section 75(3)'s requirement to obtain shareholder approval for transactions involving personal financial interest. Section 78(4)(a) permitting advancement of litigation expenses does not extend to legal fees incurred for the director's personal benefit or for matters in which the director's interests are adverse to the company. Once serious misconduct of the type described in section 162(5)(c) is established through a holistic assessment, courts have no discretion but must declare the person a delinquent director, as the purpose is to protect the public from directors who engage in serious misconduct and to promote acceptable standards of corporate governance.

The Court noted that even if Dr Smuts' version about the existence of a Joint Venture agreement was accepted (as required in motion proceedings), this did not excuse his conduct or absolve him of his statutory duties as director of Kromelboog. The Court observed that Dr Smuts' position that Kromelboog was merely a "vehicle" to pursue his biodiversity project, rather than a separate juristic entity with its own interests deserving protection, demonstrated a fundamental misunderstanding of corporate law principles and directorial duties. The Court commented that Dr Smuts "acted as if he was entitled to treat Kromelboog as merely a vehicle to pursue his project...instead of a separate juristic entity, the interests of which he had a statutory duty to protect." The Court also remarked that objectivity escaped Dr Smuts even after receiving notice on 22 June 2021 that he was acting in a conflict of interest, as he continued with his actions regardless. The judgment emphasized that the term "egregious misconduct" entails serious misconduct, and once a court finds misconduct serious, there are no degrees of egregiousness to consider—conduct is either trivial or egregious. The Court noted with concern that Dr Smuts neither saw his conflict of interest as problematic nor acknowledged the conflict, and that he solicited legal advice from a conflicted position which he must have known or ought reasonably to have known as a director.

This case provides important guidance on the application of section 162(5) of the Companies Act 71 of 2008 and the threshold for declaring a director delinquent. It clarifies that: (1) conduct constituting grounds for delinquency must be "sufficiently egregious" and involve serious misconduct, not trivial misdemeanors; (2) courts must take a holistic rather than piecemeal approach when assessing complaints against directors; (3) a director in a conflict of interest position cannot use external circumstances or alleged oral agreements to justify breach of statutory duties; (4) section 75(2)'s exclusion from disclosure requirements in respect of proposals to remove a director does not permit directors to incur expenses with personal financial benefit without shareholder approval; (5) section 78(4)(a) permitting advancement of expenses for litigation does not extend to legal fees for defending one's removal as director or for matters adverse to the company's interests; and (6) once serious misconduct as described in Gihwala is established, courts have no discretion and must declare the person a delinquent director. The case reinforces that directors owe fiduciary duties to the company itself, not to projects or other entities with which they are associated, and emphasizes the strict regulation of director conduct under the Companies Act to protect the public and promote acceptable standards of corporate governance.