Directors And Officers’ Liability In Corporate Disputes | Board Guide

The case of Salomon v. Salomon¹ lays the foundation for when the veil of corporate personality subsists as well as the exceptional circumstances when the veil can be pierced and company officers bear liability, as was stated by the court in Marina Nominees Ltd v. Federal Board of Inland Revenue² where there was alleged tax evasion, upon being found guilty, the Supreme court of Nigeria pierced the veil and the directors were personally held liable.

Corporate disputes are quite common, and they usually take the form of shareholder disputes, disputes among directors, creditors, and employment issues, to name a few. Disputes cannot be completely eliminated; however, they can be curtailed. This paper identifies the nature of corporate disputes, considers the grounds on which directors can be held liable, and finally proffers conclusions and recommendations.

NATURE OF CORPORATE DISPUTES

Disputes typically arise as a result of diverse thinking in the ordinary interfaces of individuals; corporate disputes are no different. Governance breakdown, mismanaged finances, unfairly prejudicial and oppressive conduct, etc., are forms of disputes that arise in a corporate setting, all of which will be considered; thus;

Shareholder Disputes

Being the most common form of corporate dispute, shareholder disputes usually arise when there are alleged cases of minority right infringement, exclusion from dividends, or dilution of shareholding through unfair allotment. All of these amount to unfairly prejudicial and oppressive conduct. On a lighter note, the Companies and Allied Matters Act 2020 provides for ways by which shareholders can uphold their rights and seek relief where such persists.³

Derivative action allows shareholders to bring an action on behalf of a company where those at the helm of affairs commit a wrong against the company. When this action is successful, the directors may most likely face personal liability if any of the alleged acts include: making secret profits, misappropriation of the company’s assets.⁴

Breach of Fiduciary Obligations

Directors owe a fiduciary duty to the company and the members thereof; therefore, due diligence should be applied in the regular dealings of the company, and dividends should be declared when due and shared appropriately.

When there is no transparency in the dealings, this may lead to disputes and be grounds for legal action. Some of these actions may include: undisclosed profits, making of secret profits, awarding contracts to oneself directly or otherwise.

Although the Nigerian courts would very much rather not be involved in a company’s dealings, there is strict accountability in fiduciary matters, and this translates to strict liability.

Insolvency as a Result of Wrongful Trade

In African Continental Bank Ltd v. Oladepo⁵, the court held directors personally liable to repay the debts incurred by the company, which were a direct result of the directors’ actions in permitting trade to continue despite the company being insolvent.

An action for liquidation can be commenced by creditors when such occurs. Ordinarily, when a company lacks feasible prospects of survival, trading ought to be reduced or halted completely, creditors are prioritized, and steps should be taken to reimburse them. Failure to do so amounts to a wrong, and directors’ personal liability may be incurred, as can be seen in the circumstances in Safetywear Ltd v. Dodd.⁶

Employment and Labour Disputes

Employment disputes are another common and persistent form of corporate dispute. It has the tendency to expose directors to liability, particularly if there was a breach of statutory obligations.

Some examples of labour disputes are: wrongful termination, withholding of salaries without reason, as in NULGE v NSIWC.⁷, unlawful deductions. In Iyere v Bendel Feed and Flour Mill Ltd., Footnote Reference 8, the court highlighted that legislation has tried to eliminate termination of employment based on bad faith; however, this still subsists.

Certain organizational carelessness, especially in industries with high operational risks, may give rise to directors’ liability.

Governance Disputes

This is usually an internal matter, and as it deals primarily with issues regarding the governance structures, some disputes here primarily involve: board resolutions passed with some directors absent, meetings not properly constituted, unjust removal of directors, to name a few.

Conclusion and Recommendations

It is advisable for the board to take actions that aim at preventing any form of disputes, which may involve directors or any member of the board. While this may not completely eliminate disputes in their entirety, it will greatly reduce any incidences thereof. There are other things boards should consider in this regard, and some of them are as follows;

Firstly, strict adherence to codes of corporate governance makes for a proper corporate governance structure; by extension, this stems into upholding voting procedures and proper procedures for any member of the board or company at large.

Secondly, employment disputes are on the rise. As pointed out earlier, a way to avoid disputes here is by ensuring that labour laws and the contract for employment are followed; this includes the proper notice period by the act⁸, or as agreed by the employer and employee, such notice must disclose a justifiable ground for the termination.

Finally, boards should adopt proper transparency and accountability habits, declare dividends and share when due, trade in good faith, and ensure the scale of priority is upheld during instances of insolvency.

In the event that a dispute does ensue after taking all necessary precautions, it is important that the board considers amicable settlement with the person against whom the alleged wrong was committed and ensures all conscious efforts are made to settle. After which, if it fails, alternative dispute resolution mechanisms such as negotiation, mediation, and arbitration should be explored. If all fails, then jurisdiction is submitted to the Nigerian courts.

Footnotes

1. [1897] AC 22.

2. (1986) 2 NWLR (Pt. 20) 48.

3. Section 343 of the Companies and Allied Matters Act 2020

4. Sections 344 & 346, Companies and Allied Matters Act 2020

5. (1998) 10 NWLR (Pt. 568) 216.

6. [1988] BCLC 250

7. (2020) 15 NWLR (Pt. 1747) 210

8. Labour Act 2004

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.