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COVID-19 and director liability

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ON liquidation of a company, the law imposes personal liability on persons who, knowingly, were a party to the conduct of business in a reckless or fraudulent manner.

GUEST COLUMN: Sternford Moyo/Fidelis Manyuchi

A creditor or shareholder, among others, can bring an application to the court for the person to be declared responsible without any limitation of liability, for such debts or other liabilities as the court may direct.

The law imposes liability for Insolvent trading. If a company is liquidated, the court may declare that any person responsible for the control of the company who caused or allowed the company to incur a debt at a time when he or she knew or had reasonable grounds to suspect, that the company will not be able to pay such debt, as well as other debts as they fell due, is liable for such debts or liabilities.

The law makes it risky to be a company director in this COVID-19 era. Many businesses are failing due to the economic challenges resulting from the pandemic.
It is highly likely that, in not so distant a future, there will be a multiplicity of actions against directors for Insolvent trading.

Furthermore, the law imposes liability for gross negligence. The High Court has powers to mero motu of its on accord, in the course of any ongoing criminal or civil trial in connection with a company, to declare directors or any “impugned person” personally liable for the debts or liabilities of the company in question.

The risk of insolvent trading liability has never been greater than it is now and it is not farfetched that in a few years to come, directors will be asked to account for the decisions that they will have taken during these extraordinary times.

Countries like Australia, the United Kingdom, Germany and South Africa have taken measures to insulate and protect directors by temporarily suspending the personal liability that attaches to insolvent trading as part of their COVID-19 mitigation strategies.

It is reasonable to assume that Zimbabwean directors are calm because most of them hold letters or agreements of indemnity granted in their favour by the companies which they serve. This may be a false sense of security.

Section 74 (2) of the Companies and Other Business Entities Act, Chapter 24:31 provides, inter alia, that:
“… any provisions, whether contained in the articles of the company or by-laws of the private business corporation, or in any contract with a company or private business corporation or otherwise, for the exempting of any officer of the company or member of the corporation or any person employed by the company or corporation as auditor from, or indemnifying him or her against any liability which by law would otherwise attach to him or her in respect of any negligence, default, breach of duty or breach of trust for which he or she may be guilty in relation to the company or private business corporation shall be void.
(3) In particular, no officer of a company or member of a private business corporation who is personally liable for a civil penalty shall be indemnified by the company or
corporation.”

It is important for directors with any current arrangements to seek legal advice on the validity and enforceability of any arrangements they may have.
Furthermore, it is important for our authorities to follow the example of South Africa, Australia, Germany and the United Kingdom in this regard.

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