Company’s liability for the Acts of its Directors
Price: 2000 Naira (BSC, MSC)
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1.1 Background to the Study
The need to keep pace with the realities of commerce and industry and comply with the stipulations of the law may result in the carrying out of commercial activities or business ventures by more than one person. This, when done in the main with a view to profitability, which naturally results from the pulling together of resources; money or money‟s worth by investors, the creation of an entity, a vehicle called the company is underscored.
Although one person can profitably carry on business alone, it is however not guaranteed that the business would long continue especially if he becomes incapacitated or dies. The threat to the continuity of even the most viable business in an economy as a result of death, inability to raise necessary funds, incapacity of mind or other frailties of the sole proprietor recommend the incorporation of a company which ensures ownership and participation in the management of the business by more than one person for mention. The reasons for the preference of a company to other forms of business organizations hinge extensively on the fact that a company is an artificial person recognized by law. It is within the limits of law detached from those hinge extensively on the fact that a company is an artificial person recognized by law. It has its duties, rights and obligations, which it attends to, through the instrumentality of natural persons. To this end, the law recognizes any company formed in accordance with the law of the land.
Furthermore, it is essential to note that when a Director acts as an agent on behalf of a company, he is, like any other agent, not personally liable on the contract. This is an application of the general principle of agency. On the whole a company can only be liable for the acts of its Directors when he has duly acted on behalf of the company even if the company‟s failure to carry-out the contract is due to the fault of the Directors. The Directors may be liable personally where he contracts in such a way as to assume liability.
The Companies and Allied Matters Act has commendable provisions on how accounts of the company are to be controlled as well as how Directors who manage the affairs could be controlled. Furthermore, liability and penalty have become enshrined statutorily as a means of checking erring directors and officers of a company.
Therefore, this long essay will address the liabilities of a company for the acts of its directors especially on issues relating to the Directors, in carrying out his duties and responsibilities as a company Director.
A company, being a corporate entity, can sue and be sued in its corporate name. As a matter of law, it has separate existence, identity from the brains, minds, and hands operating it to commercial functionality. The law therefore draws a clear cleavage between the company as the artificial person and the natural persons with life and limb who can operate it.
This is because a company, being an artificial person, can only act through its human agents and officers. This position was adopted in Lennnard’s Carrying Co v. Asiastic Petroleum Co Ltd by Lord Viscount Haldane in a passage quoted with approval by Aniagolu, J.S.C in Trenco (Nigeria) Ltd. v. African Real Estate Ltd where he said, inter alia „…a corporation is an abstraction.it has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody for some purpose may be called an agent but who really is the directing mind and will of the corporation, the very ego and center of the personality of the corporation…‟
In Bolton (engineering) Co Ltd v. Graham and sons, Denning, LJ characterized the position as follows A company may in many ways be likened to a human body. it has a brain and nerve center which controls what it does. it also has hands which hold the tools and act in accordance with directions from the center. Some of the people in the company are mere servants and agents who are nothing more than hands to the work and cannot be said to represent the directing mind and will of the company, and control what it does in Delta Steel (Nigeria) Ltd v. American Computer Technology Inc, Aderemi,JCA, referring to acts imputed to the company, explained as follows „In cases where the law requires the personal acts or faults of an individual so as to make a legal fiction like a company to be liable, the directors, the manager or the managing director are, in the eyes of the law, the directing mind and the will of the company; they control what the company does; the state of mind of this special class of employees is the state of mind of the company‟.
Also clear distinctions between company as the artificial person and the natural person are mentioned in the case of Adeniji v. The State and also in James v. Mid motors, The CAMA has been in force some twenty-five years now. The many calls for its review have not addressed the area of directors‘ duties. Many of the scholars writing on this aspect of the legislation were more explanatory than critical of the provisions. Yet, a cursory look at the provisions on directors‘ duties in the CAMA suggested a need for review. Added to this is the scarcity of domestic case-law in this area. The new UK Companies Act 2006 had for the first time codified the duties of directors, breaking new grounds and standardizing developments from case-law. The question is, comparatively, whether and to what extent the UK Companies Act 2006 can be a model for the CAMA in the area of directors‘ general duties of care and skill and fiduciary duties of loyalty and good faith.
1.2 Aim and Objectives of the Study
The objectives of this essay is to extensively discuss the duty and study the position of the law as stated in the Companies Allied Matters Acts,2004 on the powers and the proceedings of Directors and their personal liabilities. The duties and responsibilities of directors etc, would be discussed, with a view to letting the directors know the extent to which the company can be liable. This project work would also aim at ensuring that the company is liable for the acts of its directors during the operation of carrying out duties. Furthermore, it is also aims at ensuring the position of CAMA, 2004 as it relates to when the company would be liable for the acts of its Director and why?, The research also aimed to clarify the statement of directors‘ duties under the CAMA as well as bring them up to date with modern trends. The research objective was to compare directors‘general duties of care and skill and fiduciary duties of loyalty and good faith as codified under the CAMA and the CA, in order to show that the CAMA, after over 20 years, was far from being a model company law for Nigeria today and therefore, required review in line with the CA.
1.3 Focus of the Study
This long essay will focus very importantly on the liabilities of a company for the acts of its officers and agents for acting on its behalf, and also instances when the company will not be liable for such acts of its agents and officers.
1.4 Scope of the Study
The long essay will give account of the origin of company law, definition of a company, types, formation and the sources of powers of a company. Reference will also be made to the study of directors of a company, their types, appointment, powers, proceedings as well as their liabilities. Not leaving out the main purpose of the study which is the liabilities of a company on the acts of its directors (both civil and criminal liabilities).
1.5 Research Methodology
The research was doctrinal. The tool of comparison was used. The main legislations in the two jurisdictions, namely the English CA and the Nigerian CAMA, and case law, were the primary sources for this work. The secondary sources included text books, theses, scholarly journals as well as newspapers, consulted appropriately. Internet sources featured considerably regarding the UK aspect of the work, being a foreign jurisdiction.
1.6 Literature Review
Nigerian authors addressed directors‘ duties in the light of the statutory provisions currently in force without more. Much of the literature considered in this area, were more explanatory than critical. Importantly, none of the writers set out with an objective as the one in this work: to compare directors‘ duties under the CAMA with those under some other jurisdiction.
Ogbuanya understood s.279(2) as imposing fiduciary duties on the director in favour of shareholders and any persons dealing with the company‘s securities. Apparently, it did not occur to the author that the provision could be controversial especially considering s.279(9) allows the duty to be enforceable only by the company, to whom the director in fact owes his duties. Ali, on the other hand noted the confusion suggested by the tenor of s.279(2) and suggested that the entire subsection is unnecessary due to the further statement in s.279(9) that the duty is enforceable only by the company. These and more obvious flaws in the provision are observed further in this work.
Regarding s.279(3), Emiola observed that the best interest of the company according to the subsection, is the faithful, diligent preservation of its assets to further its business and promote the purposes for which it was formed. The fact will be debated in this work that companies, having been created for different purposes, may find their objectives changing with circumstances, so that corporate law cannot propose to set corporate objectives for them.
After observing that the duty to act in the best interests of the company is a subjective one, Bhadmus further noted that from the concluding part of s.279(3), the court would require some reasonableness, in the sense that the belief of the director must lead him to act in the manner of an ordinarily skilful director. It is obvious that the author did not find anything untoward with the statement of the law here. This perception is challenged further in this work.
By far the one aspect of the fiduciary duties considered most controversial was the requirement in s.279(4) that the director regard the interests of employees in his duties. Emiola noted that the interests of the company‘s employees in general as well as the interests of its members were now assimilated into the best interests of the company, by virtue of s.279(4). Ali on the other hand remarked that, though the provision bode well for employees and other stakeholders of the company, it was unfortunate that it was enforceable only at the company‘s discretion by virtue ofs.279(9). Bhadmus also observed how the law neither provided the employees with means of enforcing the duty therein, nor even attempted to resolve the position where the interests of the members conflicts with those of the employees. Ogbuanya simply considereds.279(4) a ‘mere pious declaration,’ as the right to enforce observance was not available for employees. These criticisms suggest that a further analysis of the issue in this work is necessary.
Ogbuanya described the duties against conflicts of interest and secret benefits as the most challenging of directors duties. On the duty of disclosure with respect to transactions with the company, he suggested that since the fine of N100.00 stipulated was ridiculous today, the general meeting may use a director‘s non-disclosure as grounds to remove him.
As for the duty of care and skill, Orojo suggested that the statement of the law in s.282 was as summarized by Romer J. in Re City Equitable Fire Insurance Co. Ltd. This work will show why the learned author is mistaken here, with due respect. As rightly observed by Ogbuanya, the CAMA improved significantly from that common law position, so that the position in s. 282 is that the scale for judging the director‘s standard of conduct is objective, whereas this was subjective under the then common law. The author believed that the imposition of such standards on the director by s. 282 thereby introduced professionalism to the office and was in line with the enormous powers vested in the company director under s. 63(3). This work will show that there is room for improvement on the standard of care, considering developments from jurisdictions outside Nigeria.
Interestingly, it did not appear to have occurred to any of the aforementioned authors that the very first statement of the duties, i.e. s.279(1) was contradictory. Nor that many of the statement of the duties require disambiguation. All the authors mostly cited foreign decisions in explaining the principles of directors‘ duties and none of them noted this interesting fact of the scarcity of local decisions on the point.On the whole, it can also be concluded that,except in the few instances stated, they have not been overly critical of the CAMA in the area of discussion.
As for the CA, from ss.170-177 in the chapter appropriately titled ―general duties of directors‖, a company directoris charged, under particular heads, with the duties to act within powers; promote the success of the company; exercise independent judgment, reasonable care, skill and diligence; avoid conflicts of interest; not to accept benefits from third parties; and to declare interests in proposed transactions or arrangements. For the first time, the duties which directors owe in England are clearly stated in unambiguous terms. Before now, much was left to the courts to decide on a case by case basis, based on principles of common law and equity. Birds et al observed that it seemed clear from s.170(4) CA that the large body of case law that had established the duties in equity and at common law, would continue to be highly relevant, as would new case-law exploring the duties of fiduciaries in general. As for the core duties of proper purpose and good faith, under ss.171 and 172 CA, the same authors were of the view that they appeared to do little more than set out the pre-existing law. This notion has been challenged by some optimists of the codified duties, particularly of s.172, as noted later in this work.
By far the most controversial aspect of the codified duties, was the provision in s.172, which required directors to act in good faith in a manner most likely to promote the success of the company for the benefit of its members as a whole, while having regard to a number of listed factors. Woodley expressed the suspicion that the provision may have been an attempt atintroducing stakeholder theory by the backdoor. Birds et al and Davies and Worthington were of the view that s.172 changed nothing from the previous law which required the director to, inter alia, consider the interests of employees. They believed that in spite of the provision, directors would continue to reach the same decisions and the courts would continue to view these the same way. This may very well be the case. However, Wild and Weinstein observed that the duty was beyond good faith, so that the six factors must find their way into every decision a director makes. Thus, the factors to be considered are subservient only to the duty of directors to promote the success of the company.
Sealy and Worthington remarked that s.172 CA explicitly favoured a long-term, rather than short term, outlook in corporate decision making. Indeed, as observed further in this work, this was the effect the CLRSG intended the provision to have in theory. Whether or not it could potentially influence practice, is a different issue. Hollington argued that s.172 proposed to teach the business man how he should make business decisions by venturing to state what the director must think, whenthis should be the proper role of voluntary codes and business schools. Arden, on the other hand, considered the section likely to improve the quality of corporate decision-making with benefits for the rest of society, in addition to leading to a much greater consciousness on the part of companies of the debt they owed to the other groups which contributed to their success, in particular employees and the communities in which they operated. Clark and Knight also commended the provisions in s.172 at least in terms of giving legitimate voice to social and environmental issues and its ability to positively affect corporate social and environmental responsibility. The various differing views regarding this foremost fiduciary duty of directors clearly require closer consideration further in this work.
Regarding conflicts of interests, Hudson opined that the principal effect of the statutory code was to provide directors with clear instructions as to how they could avoid their duties, so that under s.175, for example, directors could give one another authorization to take profits from their fiduciary duties. This, the author considered as having the potential to reduce the strictness of the fiduciary duty. As observed further in this work, this may not have been the intendment of Parliament, as the latter simply wanted to introduce and simplify authorization in order to remove the taint of prohibition. Importantly, the requirement for a disinterested board to give the authorization, is expected to improve transparency in corporate governance.
On the duties of care, skill and diligence, Arden commended the fact that s.174 CA reflected the law as developed by the courts over time, as it took account of the special background, qualifications and management responsibilities of a particular director, while not excusing a director who lacked the basic attributes that a director ought to have. As noted later in this work, this view is increasingly becoming the modern trend, in spite of the fact that the company director is not required to have any particular qualification. It is pertinent to note that none of the literatureconsidered even remotely attempted the task undertaken in this work, i.e. comparing the provisions on directors‘ duties in the two legislations under consideration. Thus, as far as is known, this work may very probably be the first of its kind.
1.7 Definition of Terms
Considering the fact that the main focus of this essay is company law; it is trite at this time to define the following viz. company, liability, director, act etc.
The word “Company” is generally used to refer to a body or an association of persons with distinct legal personality. Sometimes, however, it is used to refer to a body without legal personality such as a partnership. Therefore, Lord Justice James defines a Company as an association of persons formed for a common object. Lord Lindley in his own contribution defines a company as a voluntary association or an organization of many persons who contribute money or money‟s worth to a common stock and employ it in some trade or business and who shares profit or loss arising therefrom.
Felix C. Amadi defines company as a business entity with clear objects made up of a body or association of persons who contribute to the capital of the business with a view to, generally speaking, making profit or in rare cases, where they so choose, pursuing only the promotion of the objects but in whichever case sharing in the loss of the organization.
Learners Dictionary simply defines a company as “A number of persons united for business or commerce whose partners are not named in the title”. Black’s Law Dictionary further puts it as a „Joint stock union or association of persons for carrying on a commercial or industrial enterprise, a partner‟s corporation, association or company‟.
Company according to L.C.B.Gower implies an association of a number of people for some common objects the number need not be more than two and the interest of one need not be more than nominal as in the so called one man company.
Liability can be described according to the Osborn’s Concise Law Dictionary defines liability as subjection to a legal obligation; or the obligation itself. The person who commits a wrong or breaks a contract or trust is said to be liable or responsible for it. Liability is civil or criminal according to whether it is enforced by the civil or criminal courts.
The term director does not have a precise and accurate definition owing to complexities of legal definitions. However, owing to various definitions given to a director, it becomes therefore pertinent to examine this term under three heads, broadly grouped thus by the courts, by statutes and the legal writers.
CHARLSWORTH AND CAIN states that since a company has no physical but only a legal existence, it becomes imperative to entrust the management of its affairs to human instrument who are called “directors”, whose exact position in relation to the company is rather hard to define. Furthermore, they asserted that directors are not servants of the company, but that they are rather managers who in some certain circumstances may be said to be in a position of quasi trustees and agent of the company. To buttress this point Lord Johnstone’s dictum was cited in Milintock v. Campbell where he stated that, “the directors‟ functions are in one vein those of an agent and in another, those of a trustee” but the former predominates over the latter.
Vincent Power and Smith hold the view that a director, as the name implies, is one who directs. Although, they used short Oxford dictionary as basis of their definition offered therein is a member of a board appointed to direct the affairs of a commercial corporation.
Blackburn defined director as a person appointed, elected according to law. Authorized to manage and direct the affairs of a corporation or company. On the other hand Orojo defined directors simply as those who direct the affairs of the company. Almost all the case law definitions of director tends to say the same thing put in different ways, but the following dicta embrace almost all the principles to be derived from others:
Lord Cranworth L.C. in Aberdeen Railway Company v. Blaike Bros. stated thus, the directors are a body to whom is delegated the duty of managing the general affairs of the company. However, the most instructive definition of director is one offered by Sir Jessel M.R. in Re Forest of Dean Coal Mining Company thus Directors have sometimes been called trustees or commercial trustees and sometimes they have been called managing partners. It does not matter what you call them so long as you understand what their true position is, that they are commercial men managing a trade for the benefit of themselves and all other shareholders of the company.
According to the Osborn’s Concise Law Dictionary, a director is a person charged with the management of a company‟s money and property, and having fiduciary position. Statutory definition on the other hand tends to adopt the same approach in dealing with the above questions Section 650 of the Act defines ‘Director’ as including ‘Any person occupying the position of the director by whatever name called.‟’
Section 244(1) provides that ‘Directors of a company registered under the Act are persons duly appointed by this company to direct and manage the business of the company’. Where a person is not duly appointed a director as such, his acts do not bind the company. But where the company describes a person as a director, there is in favor of any dealing with the company, a rebuttable presumption that all persons, who are described as directors, whether as sales, executive or otherwise, have been duly appointed.
A conglomeration of all the above definitions shows that the directors maintain quite a unique and enviable position in the company and are to be regarded as the framework within which the company stands. Company directors are in a privileged position within the companies, the reasons being that they have numerous and wide powers of management of the companies.
The law recognizes that although a company is a living person, it has no natural body or organs, thus, an artificial person. As an artificial person, a company can only act through the instrumentality of human beings who constitute the organs, officers and agents of the company. In Trenco (Nigeria) Ltd v. African Real Estate Ltd, The Supreme Court recognized this position by observing „…a company, although having a corporate personality is deemed to have human personality through its officers and agents.‟ It is no doubt therefore, that for the company to carry out its activities, it needs a living person to act on its behalf. The acts of such persons during the operation of carry out its functions or duties, where liability comes to play such company would be liable for the act as if he carried out the act himself. As long as the person i.e. director can prove the act was done in the process of carry out his duty.
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