CORPORATE GOVERNANCE & CORPORATE INSOLVENCY: HOLDING

DIRECTORS OF COMPANIES ACCOUNTABLE IN NIGERIA

Common principles of Company Law and –today- Corporate

Governance require of directors that they act in good faith and in the
best interests of the company. But what exactly does that mean and
what constitutes the “company”? To what extent in law will directors of
corporate entities in Nigeria be liable personally and/or jointly with the
company itself for breach of rules of corporate governance, contract,
etc?

The Nigerian legal framework in this area of law is both statutory (please
see primarily Part IX of the Companies and Allied Matters Act (CAMA))
and Common Law based (case law).

While some of the duties imposed on directors of the company are in

relation to specific acts, other ones (such as the requirement to keep
accounting records) are actually imposed upon the company but
directors are still responsible for ensuring that the Company complies with
it.

Common Law

At Common Law, traditionally directors owe fiduciary duties (- i.e. to act

honestly and in good faith, to take decisions in the best interests of the
Company as a whole) and duties of skill, care and diligence towards the
Company judged according to both an objective and subjective
standard of competence 1 .

In practical terms therefore, a director may be personally liable to the

company (but not its shareholders) for his acts or those of the company
where he has:

o used his powers for an improper purpose;

o acted in conflict of the company’s articles;
o made personal profit from his position beyond his authorised
remuneration whether or not flowing from non-disclosure of
personal interest;

1
These basic duties are found in case law rather than the CAMA. The most commonly quoted case
on this subject in the UK case of Re City Equitable Fire Insurance Co Ltd (1925).
 o claimed to be authorised to bind the company when the
company has not conferred such authority or purported to
make a contract that fails to bind the company (signed or
authorised any cheque or bill of exchange in which the
company's name is not mentioned in full) and which the
company repudiates;

Theft and fraud.

A director may be criminally liable under the general laws of theft and
fraud (including making false statements with intent to deceive members
or creditors e.g. approval of unreasonably inaccurate accounts- which is
also a breach of statutory duty, false accounting, destroying or falsifying
company documents).

The Position of Directors in the context of Insolvency law & best

international practices.

In the UK for example, a director may be personally liable under the

Insolvency Act 1986 for:

o fraudulent trading, if he knowingly continues to carry on

business with the intention of defrauding creditors, in the
knowledge that there was no reasonable prospect of the
creditors being paid by the company;
o wrongful trading, if he continues to trade when he knows or
ought to know that there is no reasonable prospect of the
company avoiding insolvent liquidation 2 .

As it is now commonly accepted internationally that directors have

increased responsibilities, It may be argued that, in addition to the
liabilities detailed above, directors may also incur liabilities to shareholders
and third parties, if they act in a way that creates a personal obligation.
This may not easily be implied, but could be assumed having regard to
basic principles of contract/tort 3 . This means that whilst it is traditionally
accepted that directors are accountable to the company and not to the
shareholders or other stakeholders, however where the company starts
2
An Insolvency Bill (brought under the aegis of Business Recovery and Insolvency Practitioners of
Nigeria (BRIPAN) and with the collaboration of the Managing Partner of this firm) is presently
pending before the National Assembly and will in the nearest future be passed into Law, thereby
further entrenching International Best Practice in Corporate Governance in Nigeria.
3 Section 214 of the Insolvency Act 1986. For instance, where there is an express representation by

a director to shareholder/third party leading to a personal obligation to the shareholder or third

party.
going insolvent, the law imposes a duty on them to act in a way that
would protect the interests of creditors. It is submitted that the provision of
section 506 of the Nigerian Companies and Allied Matters Act (CAMA) on
this issue appears to be couched in such a way that it encompasses both
the concept of wrongful and that of fraudulent trading envisaged by the
UK Insolvency Act.

Furthermore, with the prominence given to corporate governance

principles today, in the aftermath of the collapse of US companies
WorldCom and Enron, it is submitted that the above assertion perhaps
may only require some measure of testing in practice before it becomes
entrenched in Nigerian jurisprudence 4 .

In view of the above, the critical issue in modern corporate Nigerian

jurisprudence really is whether directors' duty to act in the interests of their
company should be interpreted as meaning simply that they should act in
the interests of the shareholders, or whether they should also take account
of other interests, such as those of employees, creditors, customers, and
even the wider economy!

In some jurisdictions such as Australia, the idea advanced is that while it is

important not to constrain directors to do anything against the long-term
interests of shareholders, a narrow interpretation of their fiduciary
responsibilities could actually work against the company's interests as well
as societal interests and the national economy 5 .

In insolvency situation, the current prevailing view in Europe -if not

globally- is that as creditors are also suppliers of debt capital, directors
who made them poorer through their mismanagement of a company are
to an extent also accountable to them. This view is premised on fairness
and a redistribution of wealth between the shareholders and creditors as
suppliers of capital. It is submitted that S506 of the CAMA read in
combination with S495 of CAMA on fraudulent preference 6

There have been a lot of developments on the issue of accountability and

liability of directors and other top corporate professionals through

4
the Nigerian Securities and Exchange Commission (SEC) Code of Corporate Governance of October,
2003 which was approved by both the Board of SEC and that of the Corporate Affairs Commission
was a very positive step in the right direction. Other efforts are being made by SEC in the Nigerian
Capital Market on this issue.
5
Please kindly see for example the Australian case of AWA Ltd v Daniels.
6
The section provides for the avoidance of certain transactions prior to an insolvent company’s
liquidation which are performed leading to dissipation of assets with a view to defraud creditors of
the company.
regulation by Sectorial bodies such as NSE, SEC 7 and CBN. An example of
such in the Capital Market Industry is the statutory creation of several
criminal offences against not only directors of companies but other top
ranking professionals such as auditors under the ISA 2007. By virtue of S305
(2) on offences of public companies and capital market operators
directors will be made liable criminally and civilly for breach of statutory
obligations predicated on transparency and accountability in the area of
finance (please see Ss. 41, 63, 65, 85 to 87) if it is proved that the
corporate offence was committed with the consent or in connivance
with, or is attributable to the neglect of the directors, managers, company
secretary etc.

Conclusion

In view of the Common Law dynamism, the not so fully tested provisions of
CAMA, the recent enthronement of Corporate Governance in various key
financial sectors in Nigeria, it is our humble view that there is a sufficient
statutory framework for the entrenchment of corporate governance in
Nigeria and the regulation of acts of directors of public companies
particularly. However, it remains that implementation and enforcement of
these provisions does not yet meet up with the level of efficiency which
would make these provisions achieve real potency and the objectives
underlying their creation, perhaps owing also to a judicial system crippled
with technicalities and bureaucracy as well as technically ill-equipped
Judges who are to deal with financial issues. There remains a paucity of
cases in the Nigerian jurisprudence in this area of company law.

It is hoped that the vigorous regulation by SEC of capital market

transactions and the establishment of special tribunal such as the IST
would however invigorate this area of the law and establish a truly
efficient framework designed to call directors to book.

7
Nigerian Securities and Exchange Commission (SEC) Code of Corporate Governance of October,
2003 which was approved by both the Board of SEC and that of the Corporate Affairs Commission
(CAC)