Holding Directors Accountable- Abridged From 2007 Paper

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 o o

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used his powers for an improper purpose; acted in conflict of the company’s articles; made personal profit from his position beyond his authorised remuneration whether or not flowing from non-disclosure of personal interest;

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).

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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 international practices.

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In the UK for example, a director may be personally liable under the Insolvency Act 1986 for: 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 . o

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 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. 2

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 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. 4

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.

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)

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