Honeymoon over for reckless directors

Employees and minority shareholders have edged closer to getting powers to take legal action against directors for breach of good faith when the Companies and Other Entities Bill, currently before Parliament and set to go through public hearings, becomes law.

This comes as parliamentary portfolio committees for the Companies and Other Entities Bill, the Tripartite Negotiating Forum Bill and the Consumer Protection Bill will be holding separate public hearings on the proposed laws between February 25 and March 1, 2019.

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

Several companies in Zimbabwe have collapsed in recent years as a result of gross 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 such issues.

"Under certain conditions specified in clause 60 a member or members acting on their own behalves 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 or PBC," reads an excerpt from the Bill.

The litigants concerned must apply to the court for leave to bring or continue legal proceedings against a director or directors on behalf of the company where the company has failed to take the necessary steps in terms of a demand served upon it.

This new legal position is a departure from the common law position, which contemplated a wrong being ratified by the majority shareholders; it also departs from the "proper plaintiff rule", where the company itself has to institute legal action when a wrong has been committed against it.

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

"The enhanced derivative action remedy will advance good corporate responsibility and will promote stakeholder activism, thereby discouraging malfeasance by directors of a company and providing a remedy through court action/application," reads another excerpt from the Bill.

The proposed legislation provides criminal penalties for making false statements by directors and other officers or responsible persons of companies and private business corporations.

The High Court will also have power to declare a director or member or former director or member of a company or public company personally liable for the private company's or the public debts if he or she was responsible for carrying on its business recklessly, grossly negligently or fraudulently.

Further, the legislation provides for criminal penalties for fraudulent, reckless or wilful failure to comply with provisions of this Bill to ensure proper financial accounting by companies and public company; also for falsification or deliberate concealment or destruction or of  documents.

The law provides for disqualification of any persons convicted of certain crimes in connection with the promotion, formation or management of a company or public company from being managers or directors of such entities. Any interested persons may apply for such an order from the court.

Directors and owner-managers have 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 benefited individuals.