This article delves into the legal remedies available when such a scenario unfolds, with a particular focus on the relevant provisions in the Companies Act 71 of 2008 (“the Act”) and the Public Finance Management Act (“the PFMA”). These statutes ensure business continuity by setting minimum requirements for board composition, clarifying the limits of ministerial authority, and safeguarding against administrative overreach. Through case law, we explore how these legal principles are applied, providing crucial insights for companies navigating this challenging situation.
Legal Framework for Minimum Number of Directors
Section 66(2) of the Act specifies the minimum number of directors required for different types of companies. A private company or a personal liability company must have at least one director, whereas a public company or a non-profit company must have at least three directors.
Section 66(3) of the Act allows a company’s Memorandum of Incorporation (“MoI”) to prescribe a higher number of directors than what is specified under Section 66(2). However, the MoI cannot stipulate fewer directors than the minimum required by the Act. It is essential to note that whenever the Act sets a minimum, the MoI can only maintain or exceed that number.
What Happens If There Are Fewer Directors Than Required?
In situations where a company’s board is left with fewer directors than required by the Act or the MoI, the company can rely on Section 66(11), which states:
“Any failure by a company at any time to have the minimum number of directors required by the Act or the company’s Memorandum of Incorporation does not limit or negate the authority of the board or invalidate anything done by the board or the company.”
This provision ensures that business continuity takes precedence, preventing a crisis from paralysing the company’s operations.
The Public Finance Management Act and Board Dissolutions
In the past, there have been instances where a Minister, under whose department a public entity falls, has dissolved the entity’s board and appointed a Chief Executive Officer (“CEO”) as the board or Accounting Authority, purportedly invoking Section 49(2)(b) of the Public Finance Management Act 1 of 1999 (“PFMA”). Section 49 of the PFMA states:
49. Accounting Authorities:
(1) Every public entity must have an authority which must be accountable for the purposes of this Act.
(2) If the public entity:
(a) has a board or other controlling body, that board or controlling body is the accounting authority for that entity; or
(b) does not have a controlling body, the chief executive officer or the other person in charge of the public entity is the accounting authority for that public entity unless specific legislation applicable to that public entity designates another person as the accounting authority.
(3) The relevant Treasury, in exceptional circumstances, may approve or instruct that another functionary of a public entity must be the accounting authority for that public entity.
UniteBehind vs Minister of Transport and Others
In the case of UniteBehind vs Minister of Transport and Others [2020] 4 All SA 593 (WCC), the Minister appointed the Acting Group Chief Executive Officer as the “Administrator of PRASA” in lieu of the Board of PRASA, arguing that Section 49(2)(b) of the PFMA empowered him to designate a person as the accounting authority after dissolving the PRASA Board.
Erasmus J dismissed this argument, holding that:
“Section 49(2)(b) applies by operation of law only to public entities that do not have a board or controlling body and does not empower the Minister to designate a functionary within the public entity as the accounting authority. Section 49(3) is the empowering provision and vests such power exclusively with the relevant Treasury, with no automatic legal effect.”
Key Takeaways from the Judgment
The appointment of Chief Executive Officers as Accounting Authorities does not apply to entities that are legally required to have a board (or more than one director).
Ministers overseeing public entities are not vested with the power to appoint or designate Administrators in lieu of boards. This power rests solely with the Treasury, and Ministers can only make recommendations.
Conclusion
The resignation of board members en masse can significantly disrupt an organisation’s operations, particularly in entities that are required by law to have a functioning board. The Act ensures that business continuity prevails, even if a board temporarily fails to meet its statutory requirements. In the public sector, the PFMA restricts the unilateral actions of Ministers when dissolving boards, entrusting the relevant Treasury with any necessary reassignments of accounting authority. By understanding and adhering to these legal frameworks, organisations and public entities can better navigate governance challenges while maintaining compliance and operational stability. When dealing with issues of this nature, expert legal advice should be obtained.
