An Appraisal Of The Duties Of Directors Of A Public Company In Nigeria
ABSTRACT
The enormous and challenging responsibilities of managing incorporated companies are vested on directors by the Companies and Allied Matters Laws of the Federation, 2004.
Consequently, I am attracted into researching about these human agents, trustees and organs of the company whose acts within the purview of the Law could be said to be the acts of the company. Though “ownership” normally are vested on shareholders (it is not the objective of this project to discuss extensively on shareholding) for they bear the ultimate risk in the event of any mishap to the company. It is an established fact that directors stand in a fiduciary relationship to the company and also owe duty of care and skill.
Generally, directors owe certain obligations to the companies in the performance of their functions. It must be noted that the Act also provides for circumstances upon which a director could be removed. The responsibility of enforcing the duties of directors lies with the company, technically speaking therefore, it is the responsibility of the directors to enforce this duties. It is pertinent to note that the rule in Foss V Harbottle has been whittled down by certain exceptions, which are also statutorily provided. This project also highlights the liability of directors and when a shareholder could institute derivative action for and on behalf of the company.
Finally, I shall proffer suggestions on the ways of improving corporate management through directors and where necessary, suggest for the amendment of certain provisions in the Act which does not reflect contemporary corporate management in Nigeria and the need for our courts to live up to their constitutional responsibilities in the interpretation of statutes as it affects company directors.
CHAPTER ONE
MEANING, APPOINTMENT AND QUALIFICATIONS OF DIRECTORS
1.1 WHO IS A DIRECTOR?
A director is a person duly appointed by the company to direct and manage the business of the company.1 This definition goes a step further than the 1968 Act2 by adding due appointment as a condition precedent. Section 244 (2) provides a rebuttable presumption that all persons described by a company as directors, whether as executive or otherwise, have been duly appointed. This safeguards third parties dealing with the company. In Aberdeen Railway Co. V. Blaikie Bros3, Lord. Cransworth defined directors to be somebody to whom is delegated the duty of managing the general affairs of
- Sec 244(1) of the Companies and Allied Matters Act CAP C20 LFN 2004– the term “director” of a company would be defined “as a person appointed or elected according to Law, authorized to manage or direct the affairs of a company or Corporation” Sofowara, Mordern Nigerian Company Law”, second edition, 2006, p.425
- Formally Companies Decree No. 51 of 1968 at p
- (1859) 3 & 4 Macq 461 at p. 471 the company.
Section 245 (1) of the Act4 defines a shadow director as “any person on whose instructions and directions the directors are accustomed to act”. A shadow director is also deemed to be a director. Although this definition is not explicit, it is deemed to take care of the practice where recognized groups or corporations nominate directors on another company’s board to represent and protect their interests. This is usual with some banking institutions, which lend huge amounts of money to companies. Another good example of shadow director is where a government nominates some directors to represent its interest in a company where the government has substantial or controlling shares, for instance, the Nkalagu Cement Company Ltd has in its board some directors nominated by the government of Enugu, Anambra, Imo and Abia States. These four state governments could be described as shadow directors in relation to the Nkalagu Cement Company Ltd, because their nominee ‘directors’ are
- Decree No.1 of 1990 later designated as “Act”
accustomed to act on their instructions. It should be noted that the abovementioned situation is a deviation and an exception to the rule that directors must only be appointed by shareholders at a general meeting of the company as provided by Section 248 of the Company and Allied Matters Act, CAP C20 LFN 2004.
However, it is pertinent to mention that persons who give advice to directors in their professional capacities are not included in the concept of shadow directors.
1.2 statement of problem
It is against the foregoing background that this article analyses, in succeeding paragraphs, the duties of directors in line with CAMA, corporate governance codes and case law. Having adopted the black-letter approach as well as a comparative approach to our legal analysis, the article proceeds with an examination of corporate law jurisprudence and a review of the duties of directors under three broad categories fiduciary duties, the duty of care and duty of loyalty. This article also seeks to elucidate on certain pertinent terms like what it means for directors to act ‘in the best interests of the company’ or for ‘corporate benefit’.5
As a general rule under Nigerian company law, directors owe fiduciary duty6 to the company. This duty includes the duty to observe ‘utmost good faith’ towards the company in any transaction with it or on its behalf.7 Broadly speaking, the law expects a director to act at all times in ‘what he believes to be the best interests of the company’ in order to preserve its assets, further its business and promote the purposes for which it was formed.8 This principle of law has been codified by our statute as provided in Section 279(3) CAMA which provides that:
A director shall act at all times in what he believes to be the best interests of the company as a whole so as to preserve its assets, further its business, and promote the purposes for which it was formed, and in such manner as a faithful, diligent, careful and ordinarily skillful director would act in the circumstances.9
Notably, the phrase ‘in the best interests of the company’ used in section 279(3) CAMA, reproduced above, has permeated with legal uncertainty the jurisprudence of company law, both in Nigeria and other jurisdictions.10 Whilst there is paucity of case law on what exactly the legislature had in mind in using the words ‘what he believes to be the best interests of the company,’ one may be right to assert that the words used, as far as a literal construction of the provision will reveal, is subjective rather than objective. While the authors are not unmindful of the fact that the test for what constitutes ‘the best interests’ of the company’ could be subject to varying interpretations, the authors respectfully submit that the test that should be adopted in this instance is the subjective test as a careful reading of the relevant statutory provision will reveal that the intendment of the draftsmen is to allow the directors to make the ‘judgment call’ as to what exactly is ‘in the best interests of the company’.
The foregoing submission notwithstanding, the authors will proceed to consider how the words ‘in the best interest of the company’ have been construed in some other jurisdictions.
1.3 Objectives of study
The aim of this research is to analyse the responsibilities of the board of directors to promote the principles of corporate governance and recommendations in terms of the Company law Report and the Code. Such an analysis therefore requires research into the nature of corporate governance, the enforceability and efficacy of the Company law Report and the Code, the links between the Companies Act of 2008 and the extent to which the directors’ responsibilities under the Company law Report and the Code constitute legal duties.
1.4 Structure of Dissertation
A general introduction to the problem is given in Chapter 1. This chapter will deal with the proposal to examine the responsibilities of the board of directors in terms of the Company law Report and the Code. The reason for this examination is because many reviews and changes to the corporate governance system have been made and the Companies Act 71 of 2008 incorporates into statute for the firsttime provisions dealing with corporate governance. The introduction summarises what will be discussed in the preceding chapters.
Chapter 2 provides a general overview of corporate governance and it also explains the regulatory framework of corporate governance in Nigeria. The purpose of this chapter is to determine the nature of corporate governance. Once the nature of corporate governance is determined, the directors’ legal responsibilities can be ascertained. The definition and the importance of corporate governance are also analysed. Lastly, the impetus for new corporate governance legislation is analysed. This is necessary in order to fully appreciate the reasons for all the changes in the new Act. The main aim of this analysis is to point out the shortcomings in the old Act and to determine the reasons why the legislature decided to reform the old Act.
Chapter 3 examines the legal enforceability of Company law. Such an examination therefore requires research into the enforceability and efficacy of Company law. It is therefore also necessary to examine the responsibilities of the board of directors in terms of the Company law and to determine the relationship between Company law and the Companies Act 71 of 2008.
Chapter 4 discusses the background and development of corporate governance in the United Kingdom. The different committees and reports are therefore distinguished.
The aim is to point out the similarities and important differences between the two countries legal and regulatory framework and ultimately to find an answer to the main problem in this dissertation.
Chapter 5 summarises the main arguments of this dissertation and recommendations are made for the legislature and policy makers to improve corporate governance practices in Nigeria.
1.5 RESEARCH METHODOLOGY
The proposed research involves an examination of the relevant Nigerian and foreign legislation with regard to the responsibilities of the board of directors in promoting the principles of corporate governance. Case law, books, articles and research reports will be used to amplify the research. A comparative study of the law in the United Kingdom will also be carried out. The main purpose of the comparative study is to find a solution to the problem in this dissertation.
In general, a comparative study involves a systematic examination designed to explain similarities and differences between nations or regions. The comparative method compels us to identify similarities and differences, and then to account for them. In comparative law, a deep understanding of different legal systems could lead to lessons to be learned from each system that could influence the development of law and possibly lead to emulation and practical attempts to unify or harmonise law.[1]
Furthermore, a comparative study seems to be particularly important as section
5(2) of the Companies Act 71 of 2008 provides that: ‘[t]o the extent appropriate, a court interpreting or applying this Act may consider foreign company law’. This is complimentary to section 5(1), which directs that the Act ‘must be interpreted and applied in a manner that gives effect to the purpose of section 7’. Section 7(e) states that one of the purposes of the Act is to ‘continue to provide for the creation and the use of companies, in a manner that enhances the economic welfare of Nigeria as a partner in the global economy’.
[1] Phillip C Aka ‘Corporate Governance in Nigeria: Analyzing the Dynamics of Corporate
Governance Reforms in the Rainbow Nation’ (2007) 33 North Carolina Journal of International Law and Commercial Regulation 254-255. In this analysis Aka provides an overview, inter alia of Nigeria and the scholarship on the law of comparative corporate governance. He further provides that the comparative corporate governance scholarship seeks to understand and illuminate approaches governments in various regions of the world take relating to the regulation of the corporation, with specific attention to the origins and durability of the differences between countries or regions.
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