In the world of commerce, trust and integrity are paramount for the smooth functioning of businesses and the protection of stakeholders’ interests.
Section 68 of the Companies and Other Business Entities Act (hereafter referred to as “the Act”) addresses fraudulent, reckless, or grossly negligent conduct of business entities in an effort to safeguard the rights and interests of creditors, members, and other stakeholders.
This section provides a mechanism through which creditors, members, judicial managers, or liquidators can seek legal remedies when a business is operated in a manner that compromises its financial integrity or engages in fraudulent activities.
Furthermore, this section empowers the High Court to take decisive actions against individuals who engage in such misconduct, thereby upholding the principles of corporate governance and accountability.
Understanding Section 68
Section 68 of the Companies and Other Business Entities Act is a crucial legal provision that allows creditors, members, judicial managers, and liquidators of a company or private business corporation to seek a declaration from the High Court if they believe that the business of the entity has been conducted recklessly, with gross negligence, or with fraudulent intent.
A creditor, member, judicial manager, or liquidator has the right to institute an action in the High Court if they suspect fraudulent, reckless, or grossly negligent conduct in the company’s or private business corporation’s operations.
The essential elements of section 68 lie in subsection (3), which outlines the grounds for seeking a declaration. These grounds include:
λ Conducting business recklessly; or
λ Engaging in business with gross negligence; or
λ Carrying out business with the intent to defraud or for fraudulent purposes.
Key Aspects of Section 68:
- Declaration of Personal Responsibility: If a court determines that a business has been conducted in any of the aforementioned ways, it can declare that individuals knowingly involved in such conduct (referred to as “impugned persons”) are personally responsible, without limitation of liability, for the entity’s debts or other liabilities. This declaration can have far-reaching consequences for those individuals.
- Enforcement of Liability: The court has the authority to enforce the liability declared against impugned persons.
This may include making their declared liability a charge on any debts, obligations, mortgages, or assets of the entity involved.
This provision ensures that the impugned persons are held accountable for their actions and that creditors and other stakeholders have recourse to recover their losses.
- Civil Penalty Orders: In cases where a director of a company or controlling member of a private business corporation is found to be conducting business recklessly or with gross negligence, the Companies Registrar may serve a category 2 civil penalty order.
This order requires the controlling member to take remedial action within a specified period. This mechanism encourages timely correction of any misconduct.
- Criminal Offense: Engaging in business with the intent to defraud or for fraudulent purposes is a criminal offence under section 68. Those found guilty of this offence may face fines or imprisonment, or both. This serves as a deterrent against fraudulent conduct.
- Reporting to Prosecutor-General: If an officer or member of a company or private business corporation is found guilty of a criminal offence under section 68 or any other offence, the Companies Registrar or inspector must report the facts to the Prosecutor-General. This ensures that individuals engaged in unlawful activities face appropriate legal consequences.
Significance of Section 68
Section 68 of the Companies and Other Business Entities Act plays a vital role in promoting corporate accountability and protecting the interests of creditors, members, and stakeholders. It serves as a deterrent against fraudulent and negligent business conduct, thereby maintaining trust in the business environment.
Additionally, it provides a legal framework for remedial actions to be taken promptly when misconduct is identified, which can help mitigate potential harm to the company and its stakeholders.
Section 68 of the Companies and Other Business Entities Act is a critical provision that empowers the High Court to address fraudulent, reckless, or grossly negligent conduct in business entities.
By declaring personal responsibility, enforcing liability, and establishing penalties for misconduct, this section ensures that those who engage in such behaviour are held accountable.
Ultimately, Section 68 contributes to maintaining the integrity of the corporate sector and protecting the rights and interests of stakeholders.
The information and opinions expressed above are for general information only. They are not intended to constitute legal or other professional advice.
Kelvin Sabao is a registered Legal Practitioner and he writes in his personal capacity. He is a co-author of a book entitled ‘The Directors’ Handbook in Zimbabwe’. For more information, you can contact Kelvin via email at: firstname.lastname@example.org