HomeBusiness DigestReforming directors' duties, liability law

Reforming directors’ duties, liability law

By Alex T Magaisa

ONE of the key areas of the law regulating companies relates to the duties of directors. Also related to this is the issue of directors’ liability for breaches of such duties.

The purpose of this article is to highlight some possible reforms to the current law on directors’ duties and liabilities, using the current company law reform process in the UK as an example of what might be done.

I reiterate that the reason for using the UK template is that Zimbawean company law is basically based on both the statutory and common law position in the UK, for obvious historical reasons.

It is not my intention to give a lecture on directors’ duties but will briefly mention that they include the duties of care and skill. Basically, the duties are owed to the company.

In other words, the duties primary role is to advance and protect the interests of the company. The law on directors’ duties is based on case law. Through the determination of disputes the courts have developed a set of rules governing the duties owed to the company. There is no specific statutory statement of duties save for minor references in the Companies Act.

Consistent with the law maxim that ignorance of the law is no defence, there is an assumption that everyone knows or should know the duties of directors and the laws applying in that area.

Consequently, those who take up directorships are assumed to know what their duties are and the rules relating to liability for breach.

Given that most of these duties are case-law based, this assumption appears to be baseless when one considers that very few people have access to case law other than those who have received some minimum legal training.

However, this does not just affect directors. It also affects shareholders who are also assumed to know the duties that directors owe to the company and the avenues that are available to them to enforce the duties.

The common law also offers the avenue of the derivative action by which shareholders can take action on the company’s behalf, against deviant directors.

However, not only is it very difficult to use this action, but it is not widely known by shareholders who should make use of it. How do shareholders play a role in enforcing the duties if they do not know what avenues are available to them?

Given this situation, it is possible that apart from economic factors, ignorance, rather than the lack of grievances explains the limited levels of shareholder activism in corporate affairs.

In order to deal with these shortcomings, the reform in the UK has taken the route of ensuring that the duties of directors are not shrouded in secrecy.

The twin aims are to enhance certainty and to make the rules more widely known and accessible by directors, shareholders and other stakeholders.

The reforms will include making a statutory statement of the duties of directors to replace the common law and equitable rules. In making this statement, the legislature will aim to have duties that reflect the modern business needs and expectations of the wider pool of stakeholders. They have termed the approach “enlightened shareholder value” which in effect might also be termed the stakeholder approach.

The principle underpinning this approach is that in exercising duties, directors must promote the basic goal of ensuring the success of the company for shareholders’ benefit and in doing so must take account of the long term implications, employees’ welfare and interests, consumers’ and suppliers’ interests as well as the interests of the wider community.

The company ought to be commercially successful but also taking responsibility for wider interests. The same approach will apply to the remedies for breach of duties in that there will be a restatement of the common law and equitable rules to ensure certainty and wide knowledge across the market.

The statutory statement of duties will leave room for courts to interpret and develop provisions as appropriate to enable the development of the law in line with changing business needs and circumstances.

In addition, there will be provision of separate guidance in plain language to enable users to have access of the rules. These changes should at least bring major issues in company law closer to the people who use them thereby enhancing the potential for a more useful role in the governance of companies.

As far as liability is concerned the reforms are guided by two counter-balancing concerns. First, there is a desire to ensure that there are strong laws to deal with cases of negligence and dishonesty on the part of directors. At the same time there is a need to retain a large and diverse pool of qualified persons who are willing and prepared to take up directorships.

On the one hand, too much risk of personal liability may scare off high-quality candidates for directorships but too much protection might also lead to moral hazard whereby unscrupulous individuals may take on unnecessary risk which can be damaging. There were statutory developments in 2004 which provided for companies to provide indemnity to directors against most liability to third parties.

Companies can also pay the directors’ legal costs upfront. However, there is a condition that the director will be required to repay the company if he or she is convicted in any criminal proceedings or judgement is given against him/her in any civil proceedings brought by the company or an associated company.

There is still further consideration with regard to whether there should be further reform to allow companies to limit directors’ liability to the company for breach of duty of care, skill and diligence.

In conclusion, it is clear that the reform process in the UK is guided by the desire to make the law more accessible to users. The more knowledge and information the stakeholders have, the better they are able to make informed decisions.

It is expensive and time consuming to always resort to professional advisors for simple issues that can be handled internally. Indeed if people who need to use the law do not know the laws because they are not clearly stated, it becomes very difficult for them to carry out their responsibilities.

It is difficult in such a scenario, to effectively promote corporate governance. I have sought to bring to the attention of interested stakeholders these developments in a jurisdiction on which law ours is largely designed in the hope that it may spur debate on how to enhance our own corporate landscape.

*Dr Alex Magaisa specialises in company and financial services law and can be contacted at alex.magaisa@nottingham.ac.uk or wamagaisa@yahoo.co.uk.

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