Govt tightens screws on directors

Government is working on amendments to the Companies Act with a view to tightening legal provisions and placing increased fiduciary duty of responsibility and accountability on company directors by empowering shareholders and workers to sue directors over reckless conduct regarding a firm's business.

Minorities with collective interest amounting to at least 5 percent, will also have power to call for investigation into the conduct of directors or companies and private business corporations when and if they feel there has been dereliction of duty, breach of faith, trust or reckless conduct by directors.

This comes as several companies in Zimbabwe have collapsed in recent years under circumstances presumed to have been a result of mismanagement or reckless conduct of directors, but little could be done to bring the offenders to book, as the existing laws were deemed vague on how to do it.

Directors and owner managers abused their power to asset strip, divert resources or extend loans to each other or related parties without following due processes, which in most cases prejudiced companies and benefitted individuals.

While deficiency of good corporate governance claimed many scalps in banking, entities in other sectors also suffered, but it is generally believed bringing legal suit against perpetrators was difficult, as there was insufficient legal provision and clarity on the description of improper conduct of directors.

But fresh legal provisions to be brought about through the Companies and Other Entities Bill, which amends the current Companies Act, shareholders and employees, would be legally empowered to instigate, singularly or severally, prosecution of directors for their roles in prejudices suffered by companies, without seeking ratification of such by a majority.

The proposed law has specific provisions that deal with offences and defaults common to companies and private corporations.
"Under certain conditions specified in clause 58 a member or members acting on their own behalf against any director for breach of good faith or want of care or diligence in that capacity may also at the same time bring action on behalf of the company.

"The litigants concerned must apply to the court for leave to bring or continue legal proceedings on behalf of the company where the company has failed to take the necessary steps in terms of a demand served upon it," the Bill reads.
According to provisions of the Bill, this was a departure from the common law position, which contemplated a wrong being ratified by the majority shareholders and also departs from the "proper plaintiff rule", where the company itself institutes legal action when a wrong has been committed against it.

"The clause goes further in allowing in exceptional circumstances for an interested person other than a (shareholder) to apply to court to institute proceedings without demanding action from the company first. Employees too can therefore bring a derivative action against a company."

Derivative actions are legally sanctioned claims brought by individual shareholders, acting on behalf of a company, against the company's directors. They are brought in respect of wrongs committed against the company that, for whatever reason, the company is not willing to pursue in its own right.

"The enhanced derivative action remedy will advance good corporate responsibility and will promote stakeholder activism, thereby discouraging malfeasance by directors in relation to their company and providing a remedy through court action/application."

Similarly, the new piece of legislation has provisions that will enable minority shareholders of companies and minority members of private business corporations to request the Registrar of Companies to initiate an investigation of the company or private corporation (that is, shareholders or members of at least 5 percent of the total shareholding or interests.

Under clause 60 of the law, the High Court will have the power to declare a director or member or former director or member of a company or private business personally liable for the company's debts if he or she was responsible for carrying on its business recklessly, grossly negligently or fraudulently. The legislation will also provide for criminal penalties for fraudulent, reckless or willful failure by company directors or officers to comply with provisions of this Bill, to ensure proper financial accounting by companies and also for the falsification or deliberate concealment or destruction of documents.

Clause 62 of the legislation will provide for the disqualification of any persons convicted of certain crimes in connection with the promotion, formation or management of a company or PBC from being managers or directors of companies or controlling members of PBCs. Any interested persons may apply for such an order from the court.
Also, the law will outlaw the concealment of the beneficial ownership of shares through the use of nominees (except in certain specified circumstances).

A "beneficial owner" is defined in the Bill as "a natural person who ultimately owns, controls, or benefits from a company or trust and the income it generates".

This comes after the Financial Action Task Force issued a recommendation to address the misuse of companies as vehicles for money laundering and terrorist financing, by requiring that states establish the identity of each natural person who exercises control of a company through one or more nominees.