Ease of doing Business: A Codification of director’s fiduciary duties under the new Companies Act.

 

by Lincoln Majogo

 

The Companies and other Business Entities Act passed in 2020 replaced the Companies Act which had been in force since 1951. Amongst a plethora of revolutionary changes to the manner in which business is carried out in Zimbabwe was legislative rehabilitation of common law principles. The widely celebrated Salomon case solidified the principle of corporate personality which perceives a company as a fictitious person capable of incurring rights and obligations as a natural person. The lottery ticket for this principle lay inside limited liability for directors in that their personal assets cannot be attached when suing a company since the company is a person at law capable of suing and being sued in its own capacity independent of its employees.

Whilst the wisdom of the Salomon case is something one cannot ignore, this precedent let loose an army of stray directors who could simply defraud innocent third parties in the name of the company and walk away scot-free as the company would suffer the derelicts of its agents. The precedent found shelter in its twin agency law principle contained in a maxim “qui facit per alium facit per se” which if translated means a principal is sued for the sins of their agent and the director always being the agent had protection even after straying off. From the foregoing, it is easily discernible over the sheer attempts to codify directors duties came as a result of the unparalleled abuse of the corporate personality principle which made directors more concerned about personal fortune than the company as the risk of failure always lay with the company without liability attached to the director.

This legislative flaw inside the archaic companies act was a safe ticket out of prison for most directors as very few legislative provisions attached civil or criminal liability to their acts. A revolutionary stance of the new Act in 2020 was to codify these duties. A glance act from section glance at section 54 is a testimony of this codification of duties such as the duty of loyalty, duties with regards to conflicts of interest’s etcetera. Nothing of this was contained inside the old companies act and the import of these provisions is that a great deal of liability is attached upon directors.

The rationale of such revolutionization of directors common law fiduciary duties is to curb down the exponential rise of cases of cross directorships in which directors end up not attaching a great deal of respect and seriousness to company affairs for the pursuit of personal grandeur. No doubt the importance of this provision is to arrest incompetence and establish a general legislative yardstick upon which the director’s competence can be measured and liability attached. The new act under section 54 provides

Duty of care and business judgment rule

(1) Every manager of a private business corporation and every director or officer of a company has a duty to perform as such in good faith, in the best interests of the registered business entity, and with the care, skill, and attention that a diligent business person would exercise in the same circumstances.

The wording makes it crystal clear this duty is not discretionary for officers of the company i.e. directors, managers etc. In other words, had the legislature say every manager may exercise a duty to perform as such in good faith……. It would mean they have the discretion to exercise the duty or not to. With this wording, failure to exercise such duty attracts liability.

The same can be said for section 55 which aptly codified the director’s duty of loyalty. Of importance the complimentary section to sections 54 and 54 which is section 57 which reads as follows:

(1) If a person referred to in section 55 (“Duty of loyalty”) (but subject to section 56 (“Transactions involving conflict of interest”) (2) (b) or (3)), has a personal financial interest in respect of a matter to be considered at a meeting of the board of the company or meeting of the members of the private business corporation, or knows that an associate has a personal financial interest in the matter, the person—

(a) must disclose the interest and its general nature before the matter is considered at the meeting; and

(b) must disclose to the meeting any material information relating to the matter, and known to the person; and……… (Underlining is for emphasis)

The import of the provision it in plain and literal meaning is that such obligation is mandatory and not discretionary. In other words, a director should disclose a personal financial interests and failure to do so attracts liability. This as already has been noted is precisely a nail in the coffin to cross directorships as well as self-motivated acts for personal fortune. The provision is similar to South Africa’s position with the promulgation of the Companies Act of 2008.

Section 76 of the Act addresses the standard of conduct expected from directors and extends it beyond the common law duty of directors by compelling them to act honestly, in good faith and in a manner they reasonably believe to be in the best interests of, and for the benefit of, their companies(Workman’s Attorneys) Section 76(3) of the Act states that a director of a company, when acting in that capacity, must exercise the powers and perform the functions of a director: in good faith and for a proper purpose; in the best interests of the company; and with the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions in relation to the company as carried out by that director, and having the general knowledge, skill and experience of that director(Workmans Attorney's supra).

Patently noticeable in both the South African provision and the new one is the use of the word must, denoting mandatory obligation. The rationale as already highlighted is to increase the accountability of directors. Section 77 further provides for directors liability.

The Companies Act of 2008 South Africa further provides a prescription period within which one can file actions against directors. Proceedings to recover any loss, damages or costs for which a person is or may be held liable in terms of section 77 of the Act may not be commenced more than three years after the act or omission that gave rise to that liability(Workman’s Attorneys). The provision was designed to give fortress in the form of legal recourse to damages to innocent third parties who would have suffered at the hand of unscrupulous directors.

The Companies and Other Business Entities Act whilst silent on the prescription period of the claim also provides for the liability of directors under section 62 subsections 3b and various other parts of the voluminous piece of legislation.

The importance of these provisions is undisputed. It places in safety both the affairs of the company and that of innocent third parties i.e. creditors from predatory behaviours who hide under the shadow of corporate personality to defraud credulously the unsuspecting public. From the foregoing it is clear the importance of this codification is to promote trustworthy business transactions by setting standards upon which company directors can be personally made liable.

 

Bibliography

1.       Workman’s Attorneys, Companies Act No 71 of 2008, Duties and Liabilities of Directors fully accessible on https://www.werksmans.com/wp-content/uploads/2013/04/Director-duties-and-liabilities-FINAL-updated-electronic.pdf