One of the fundamental principles of company law is that a company is a legal person separate from its directors and shareholders.
This means that, ordinarily, a company’s debts are the debts of the company, not the personal debts of its directors.
However, limited liability does not give directors absolute immunity from personal liability.
There are circumstances in which a director can become personally liable for obligations arising from the company’s business, particularly where the director has acted outside the protection ordinarily afforded by separate corporate personality or has committed a breach that attracts personal liability.
The Companies and Allied Matters Act 2020 (CAMA 2020) expressly recognises circumstances in which directors and other officers can incur personal liability. For example, section 316 makes directors or officers personally liable where money or property received for a specific purpose or project is, with intent to defraud, not applied for that purpose.
Understanding the distinction between company liability and personal liability of a director is therefore essential for both company directors and creditors.
Is a Director Personally Liable for a Company’s Debt?
Ordinarily, no.
A company incorporated under CAMA is a legal person separate from its directors and shareholders.
The company can own property, enter into contracts, incur debts and sue or be sued in its own name.
Consequently, where a company legitimately borrows money or purchases goods on credit, the company’s creditor ordinarily has a claim against the company.
The mere fact that a person is a director does not automatically make that person personally responsible for the company’s debt.
This is the essence of the principle of separate corporate personality.
Why Are Directors Ordinarily Not Liable for Company Debts?
The principle exists because the company has a legal personality separate from the individuals who manage or own it.
A director acts as an officer of the company.
Where the director enters into a transaction on behalf of the company within the scope of the company’s authority, the resulting obligation is ordinarily that of the company.
CAMA recognises this principle. Section 89 provides, among other things, that acts of the general meeting, board of directors or managing director in the usual course of the company’s business are treated as acts of the company itself, with the company being civilly and criminally liable to the relevant extent.
Therefore, a creditor cannot simply sue a director personally merely because the director signed a company contract in their capacity as director.
Does Signing a Contract Make a Director Personally Liable?
Not automatically.
A director frequently signs agreements on behalf of a company.
The important question is the capacity in which the director signed the agreement.
If the agreement clearly identifies the company as the contracting party and the director signs on behalf of the company, the contractual obligation ordinarily belongs to the company.
For example:
ABC Limited, acting through its Managing Director, borrows ₦50 million from XYZ Bank.
If the Managing Director signs the loan documentation solely as an authorised representative of ABC Limited, the debt is ordinarily ABC Limited’s debt.
The director does not become personally liable merely because the director signed the document.
The position changes if the director separately undertakes personal liability.
When Can a Director Become Personally Liable for a Company Debt?
There are several situations in which a director can become personally liable.
These include where the director:
- gives a personal guarantee;
- acts fraudulently;
- commits a tort personally;
- misapplies money received for a specific purpose in circumstances covered by CAMA;
- engages in conduct for which legislation imposes personal liability;
- acts outside the company’s authority in circumstances giving rise to personal liability;
- participates in wrongful or dishonest conduct; or
- falls within another recognised exception to the principle of separate corporate personality.
The mere existence of a company debt is not enough.
There must be a legal basis for transferring or imposing liability on the director personally.
Can a Director Be Personally Liable Because of a Personal Guarantee?
Yes.
A personal guarantee is one of the clearest circumstances in which a director can become personally liable for a company’s debt.
Suppose a bank lends ₦100 million to a company and requires its managing director to execute a personal guarantee.
The primary borrower remains the company.
However, if the company defaults and the terms of the guarantee are triggered, the bank can enforce the guarantee against the director personally, subject to the terms of the guarantee and applicable law.
This is why directors should never sign personal guarantees casually.
A director signing a company loan document should determine whether the document merely records the director’s authority to act for the company or creates a separate personal obligation.
What Is the Difference Between Signing as Director and Signing as Guarantor?
The distinction is fundamental.
Signing as Director
The director signs on behalf of the company.
The company assumes the contractual obligation.
Signing as Guarantor
The director separately undertakes to answer for the company’s obligation if the conditions of the guarantee are satisfied.
The director can therefore become personally liable.
A document can contain both capacities.
A director should therefore read the entire agreement rather than assume that every signature placed on behalf of a company carries the same legal effect.
Can a Director Be Personally Liable for Fraud?
Yes.
Separate corporate personality does not protect an individual from personal liability for their own fraudulent conduct.
A director cannot use the company as a shield for fraud personally committed by the director.
For example, if a director deliberately makes false representations to obtain money for the company and personally participates in the fraudulent conduct, the fact that the company received the money does not automatically protect the director from personal consequences.
The precise cause of action and relief will depend on the facts.
Can a Director Be Personally Liable for Misappropriating Company Money?
Yes, depending on the circumstances.
A director who misappropriates company funds can face personal liability and other legal consequences.
A director’s position does not give the director ownership of the company’s money.
Company funds belong to the company.
Where a director improperly takes, diverts or applies company funds for personal purposes, the company can have claims against the director.
There can also be regulatory or criminal consequences depending on the conduct.
Can a Director Be Personally Liable for Money Received for a Specific Purpose?
Yes.
This is expressly addressed by section 316 of CAMA 2020.
The provision applies where a company:
- receives money by way of a loan for a specific purpose;
- receives money or property as an advance payment for the execution of a contract or project; and
- with intent to defraud, fails to apply the money or property for the purpose for which it was received.
Where the statutory conditions are satisfied, every director or other officer in default is personally liable to the party from whom the money or property was received for its refund. The section also makes clear that the company’s liability is not extinguished.
This is an important statutory exception to the ordinary rule that company debts remain company debts.
Does Section 316 Make Every Director Automatically Liable?
No.
The section does not make every director personally liable merely because the company misapplied money.
The statutory conditions must be established.
In particular, the provision concerns money or property received for a specific purpose or project and contains the requirement of intent to defraud.
The question therefore becomes whether the director was in default and whether the conduct falls within the statutory provision.
A creditor should not assume that section 316 automatically converts every company debt into a personal debt of every director.
Can a Director Be Personally Liable for a Company’s Tax Debt?
A company’s tax obligations ordinarily belong to the company.
However, tax legislation can impose specific obligations or liabilities on directors or officers in particular circumstances.
The applicable tax legislation and the facts must therefore be examined before determining whether a director is personally liable.
A director should not assume that incorporation completely eliminates personal exposure for every regulatory or tax obligation.
Can a Director Be Personally Liable for Employee Claims Against the Company?
Ordinarily, an employee’s contractual claim for salary or other employment benefits is against the company that employed the person.
A director does not automatically become personally liable merely because the company owes employees money.
However, personal liability can arise where the director personally committed a separate wrong or where a specific statute imposes liability on the director.
The precise facts and applicable legislation therefore matter.
Can a Director Be Personally Liable for a Company’s Loan?
Ordinarily, the loan is the company’s liability.
However, a director can become personally liable where the director:
- executed a personal guarantee;
- entered into a separate indemnity;
- committed fraud;
- misapplied funds in circumstances covered by section 316 of CAMA; or
- otherwise incurred personal liability under the law.
Therefore, the question is not simply:
“Is the director a director of the company?”
The proper question is:
“What legal basis exists for imposing the company’s debt on the director personally?”
Can a Creditor Sue the Director Instead of the Company?
A creditor can sue a director personally where there is a legally sustainable personal cause of action against the director.
But a creditor cannot simply bypass the company and sue a director personally merely because the company has failed to pay its debt.
The pleadings should disclose the factual and legal basis for the director’s personal liability.
If the only allegation is that:
“The company owes me money and the defendant is a director of the company,”
that does not, by itself, establish personal liability.
Can a Court Lift the Corporate Veil?
The principle of separate corporate personality is fundamental, but it is not absolute.
In exceptional circumstances, the court can look beyond the separate corporate personality of a company where the facts and law justify doing so.
However, the corporate veil is not lifted merely because:
- the company owes money;
- the company is unable to pay its debts;
- the company has lost a lawsuit; or
- the claimant considers it unfair that the shareholders or directors are protected by limited liability.
There must be a recognised legal basis for disregarding the company’s separate personality.
A creditor seeking personal liability should therefore identify the specific facts and legal principle relied upon rather than simply asking the court to “lift the corporate veil.”
What If the Company Was Created to Avoid an Existing Obligation?
The court can scrutinise arrangements designed to use the corporate structure as an instrument of fraud or to defeat an existing legal obligation.
Where the evidence establishes that the company structure was being abused, the court can grant appropriate relief in accordance with established legal principles.
However, incorporation itself is not evidence of fraud.
A claimant must establish the facts relied upon.
Does Limited Liability Mean Directors Can Never Lose Their Personal Assets?
No.
Limited liability protects the members of a company from automatically being personally responsible for the company’s liabilities.
It does not mean that a director’s personal assets are immune from every claim.
For example, a director who personally guarantees a company loan can have personal assets exposed if the guarantee is enforceable.
Similarly, a director who incurs personal liability through fraud or another recognised legal basis can be sued personally.
The protection of limited liability should therefore not be confused with absolute personal immunity.
Can Directors of a Limited Company Have Unlimited Liability?
Yes, in a limited company there are circumstances where the liability of directors, managers or a managing director can be unlimited.
Section 314 of CAMA 2020 provides that the liability of directors, managers or a managing director in a limited company can, where the memorandum so provides, be unlimited.
CAMA also provides for a limited company to alter its memorandum by special resolution to make the liability of its directors or managers, or managing director, unlimited where the statutory requirements are satisfied.
This is distinct from the ordinary position in a company limited by shares.
What Should a Director Do Before Signing a Company Guarantee?
A director asked to guarantee a company obligation should carefully examine:
- the principal agreement;
- the guarantee;
- the amount guaranteed;
- whether the guarantee is limited or unlimited;
- the circumstances triggering liability;
- whether interest and enforcement costs are included;
- whether the guarantee is continuing;
- how the guarantee can be terminated; and
- whether security is also being provided.
The director should obtain independent legal advice where the financial exposure is significant.
What Should a Creditor Do If It Believes a Director Is Personally Liable?
A creditor should first identify the legal basis for the claim.
The creditor should gather:
- the company’s incorporation documents;
- contracts;
- loan documents;
- guarantees;
- correspondence;
- payment records;
- board resolutions where relevant;
- evidence of representations;
- evidence of fraud or misconduct, where alleged; and
- evidence showing the director’s personal involvement.
The creditor should then determine whether the claim is properly against:
- the company;
- the director;
- both the company and director; or
- another party.
A director should not be joined to proceedings merely because the person holds office.
What Defences Can a Director Raise?
A director facing a claim for a company debt can rely on the principle of separate corporate personality where appropriate.
The director can argue, depending on the facts, that:
- the company was the contracting party;
- the director acted only as an authorised representative;
- no personal guarantee was given;
- no personal undertaking was made;
- the alleged misconduct was not personally committed by the director;
- the statutory conditions for personal liability have not been established; or
- the claimant has not disclosed a legally sustainable cause of action against the director.
The defence will depend on the facts and documents.
Practical Example
Assume ABC Limited obtains a ₦50 million loan from a bank.
The managing director signs the loan agreement on behalf of ABC Limited.
ABC Limited subsequently defaults.
Situation 1: No Personal Guarantee
If the managing director did nothing more than sign as an authorised representative of ABC Limited, the loan remains the company’s liability.
The director is not personally liable merely because the director signed the agreement.
Situation 2: Personal Guarantee
If the managing director also signs a personal guarantee, the director can become personally liable in accordance with the guarantee.
Situation 3: Fraudulent Misapplication of Funds
If the company received money for a specific project and the director, with intent to defraud, caused the money to be diverted instead of being applied to that project, section 316 of CAMA can become relevant.
The director can then face personal liability if the statutory requirements are established.
These examples demonstrate why the mere existence of a company debt does not answer the question of personal liability.
Key Points for Directors
Directors should remember that:
- A company’s debt is ordinarily the company’s debt.
- Being a director does not automatically make you personally liable for company debts.
- A personal guarantee can create personal liability.
- Fraudulent conduct can expose a director personally.
- Section 316 of CAMA 2020 creates a specific statutory basis for personal liability in certain circumstances.
- Company money belongs to the company and should not be treated as personal money.
- Directors should carefully distinguish between signing for the company and signing personally.
- Limited liability is not absolute immunity.
Key Points for Creditors
Creditors should also remember that:
- A director is not automatically liable for the company’s debt.
- The existence of a company debt alone is insufficient to establish personal liability.
- A personal guarantee can provide a direct basis for a claim against a director.
- Fraud or other personal wrongdoing can create independent liability.
- Section 316 of CAMA should be considered where money or property was received for a specific purpose and the statutory requirements are satisfied.
- The pleadings should clearly establish the legal basis for suing the director personally.
Conclusion
The general rule in Nigerian company law is clear: a director is not personally liable for a company’s debt merely because the person is a director.
The company’s separate legal personality ordinarily protects directors and shareholders from personal liability for corporate debts.
That protection, however, has recognised exceptions.
A director can become personally liable where the director gives a personal guarantee, commits a personal wrong, engages in fraudulent conduct, falls within a statutory provision imposing personal liability or otherwise incurs a personal obligation independent of the company’s liability.
Section 316 of CAMA 2020 is particularly important because it expressly imposes personal liability on a director or officer in default where its specified conditions concerning money or property received for a particular purpose or project and intent to defraud are established.
The critical question in every case is therefore not simply whether the company owes money, but whether there is a legal basis for making the director personally liable for that obligation.
If you are a director facing a claim for a company’s debt, or a creditor seeking to determine whether a director can be held personally liable, Lexforte Attorneys can review the relevant contracts, guarantees, company records and circumstances of the transaction and advise you on the appropriate legal position and remedies. Contact Lexforte Attorneys for professional assistance with company debt disputes and directors’ liability in Nigeria.