It is an important prerequisite for attracting investment and helps to accomplish sustainable improvement in shareholder value. In efforts to promote better corporate governance, several countries have been enacting laws to clearly define standards of accountability and transparency to direct corporate behaviour.
In 2018, Zambia walked down that road by enacting the Companies Act No. 10 of 2017 (the “Companies Act”), which codified the common law duties of directors under Part 7, in line with global practice. This introduced a major shake-up of corporate governance standards in Zambia. The statutory duties have serious implications for directors of companies incorporated in Zambia.
So what is the fuss?
Up until the enactment of the Companies Act which came into force in June 2018, company director’s duties were regulated by common law principles established and developed through decisions of the courts over a period.
The Companies Act codified the director’s duties by: describing them; broadening and modifying them, in certain cases (for instance, the responsibility with respect to risk management and reckless trading); and providing a mechanism for enforcement of the duties.
The advantage of this codification is that it has made the law more accessible to shareholders, directors and non-experts. For example, shareholders will now know what duties are owed to the company and the mechanism for enforcement.
It is anticipated that the codified duties will provide greater clarity on what is expected of directors, which will in turn increase the accountability of directors to shareholders and improve standards of governance.
What does this mean for corporate directors?
If you are a company director, you need to know that the responsibility of managing a company will require more commitment and diligence.
Therefore, any person who acts as a director or is nominated for appointment as a director of a company whether large or small, private or public, needs to familiarise themselves with what the law expects of them and feel confident that they can meet that standard.
And to enforce this, the Companies Act sets serious implications for breaching the law, which include disqualification and personal liability, both criminal and civil.
What statutory duties do directors owe?
The Companies Act brings to the fore the role of the board of directors with respect to risk management and oversight. Directors will need to ensure appropriate measures are put in place for the adequate assessment, evaluation and mitigation of risk in all decision making.
The reckless trading duty not to cause, allow or agree for the business of the company to be conducted in a manner likely to cause substantial risk of serious loss to a shareholder or creditor is likely to cause significant concern for a director. The Companies Act sets a 'reasonableness' standard by defining 'substantial risk of serious loss' as risk of such a nature or degree which if disregarded will constitute a gross deviation from the standard of care that a reasonable person would exercise. Whether a risk is reasonable will vary for different businesses and industries. Arguably, this may stifle entrepreneurship and the ability of directors to take legitimate business risks as they will be more inclined to take a more cautious approach. Directors of companies in financial distress, in particular, will need to consider the implications of continuing to trade considering this responsibility.
Overarching duty of compliance with the Companies Act
There is an overarching duty not act or agree to the company acting in a manner that breaches the Companies Act or the articles of association. This means that directors will need to be familiar with not only their own individual obligations, but also what the company must do to comply with its statutory obligations under the Companies Act.
Non-compliance with this duty is an offense whose liability is a fine or imprisonment for a term of up to 12 months or disqualification from being appointed as director for a period of up to 5 years.
What about enforcement?
At common law, director’s duties are owed to the company or body of shareholders and not individual shareholders. Therefore, a shareholder could only sue a director for breach of duty, in the name of or on behalf of a company through a derivative action, which is basically a lawsuit brought by a company shareholder against the directors, management and or other shareholders of the company, to seek redress for a wrong against the company.
While the shareholders collectively remain the beneficiaries of the duties of directors under the new Companies Act, one of the most important changes introduced by the Act, is that, in addition to a derivative action, it gives a shareholder the ability to directly hold a director accountable.
For example, a shareholder or former shareholder can bring an action against a director for the breach of a duty owed to them. They can also bring an action against the company for the breach of a duty owed by the company to the shareholder.
The effect is that as shareholders become aware of their rights, directors are likely to be exposed to the threat of litigation from disgruntled shareholders and as a result likely to be exposed to shareholder (investor) activism, a rising trend globally.
Liability of Directors
A director is personally liable to compensate the company for any loss suffered as a result of willful breach of any duty or responsibility under the Companies Act. In addition, there are various other pieces of legislation (including the Companies Act) that place the burden and responsibility of corporate compliance on directors, which directors need to be mindful of.
For instance, for all offenses committed by a Company under the Companies Act, directors are deemed to have committed the offense and liable to the penalty specified unless they can prove lack of knowledge of the wrongdoing, lack of consent, lack of connivance (involvement) or that reasonable steps were taken to prevent the commission of the offense.
During liquidation proceedings, a liquidator or creditor can apply to the court to enquire into the conduct of a director in relation to the breach of any duties to the company and the director may be ordered to compensate the company.
What about disqualification?
A company, its creditors or the Registrar of Companies may apply to the court for an order disqualifying an erring director from any future appointments. A director may be disqualified from being appointed as director for a period of up to five years for committing an offense under the Companies Act or breaching any of the statutory duties of a director specified under the Companies Act.
Is resignation a solution?
Resignation is not a solution to the breach of director’s duties and non-compliance with the Companies Act. Liability survives resignation or removal from office.
To be precise, for a period of five years, post-resignation, removal or vacation from office, directors continue to be liable for acts, omissions and decisions made as a director.
What about Creditors?
Directors, at common law, owe creditors no fiduciary duty if the company is solvent, but will owe a duty to act in the interests of the general body of creditors where the company is insolvent, or the creditors are at risk. Under the reckless trading duty in the Companies Act, a director must not cause, allow or agree for the business of the company to be conducted in a manner likely to cause substantial risk of serious loss to creditors. This reinforces the common law duty that directors owe to creditors. The common law principle that when a company is on the brink of insolvency, the balance of responsibility shifts, and the duties are owed to creditors rather than the shareholders, is likely to influence how the reckless trading duty is applied and interpreted.
The content of this article is general in nature and not intended as a substitute for specific professional legal advice on any matter and should not be relied upon for that purpose.