One of the fundamental principles of company law is that a company is a separate legal entity from its shareholders and directors. Consequently, the fact that a person is a director does not ordinarily make that person personally liable for every debt incurred by the company. However, limited liability does not give directors immunity from personal liability. There are circumstances in which a director can be held personally responsible for a company’s debt, loss or wrongful act. These circumstances arise from legislation, the director’s own conduct, personal guarantees, breach of fiduciary duties, fraud and certain situations involving insolvency or misuse of company property. The Companies and Allied Matters Act 2020 (CAMA 2020) contains specific provisions dealing with the personal liability of directors and officers. In particular, section 316 imposes personal liability in specified circumstances where a company receives money or property for a specific purpose or project and, with intent to defraud, fails to apply it for that purpose. This article explains when a director can be personally liable for a company’s debt or wrongful acts in Nigeria, and when the separate legal personality of the company protects the director. Is a Director Personally Liable for a Company’s Debt in Nigeria? Ordinarily, no. A company incorporated under CAMA is a separate legal person. A debt incurred by the company is therefore ordinarily the debt of the company, not automatically the personal debt of its directors. The mere fact that a person is a director does not make that person a guarantor of the company’s obligations. This principle is important because the company structure exists precisely to separate the company’s liabilities from the personal liabilities of its members and officers. However, there are important exceptions. When Can a Director Be Personally Liable for a Company’s Debt? A director can become personally liable where, for example: the director personally guaranteed the company’s obligation; the director acted outside the protection of the corporate structure in circumstances recognised by law; the director committed fraud; the director misapplied company money or property; CAMA expressly imposes personal liability; the director breached a personal statutory or fiduciary obligation; the company’s business was carried on fraudulently or recklessly in circumstances covered by insolvency provisions; or the director personally committed the wrongful act giving rise to the claim. The precise basis of liability must therefore be established. Does a Director Become Liable Simply Because He Signed a Company Contract? No. Where a director signs a contract expressly on behalf of a company and acts within the authority of the company, the contractual obligation ordinarily belongs to the company. CAMA recognises the distinction between the company and its officers. Acts undertaken by the company’s authorised organs in the ordinary course of business can constitute acts of the company itself. A creditor therefore cannot automatically convert a company debt into the personal debt of a director merely because the director signed the contract. The position changes where the director signs in a personal capacity, gives a personal guarantee or commits an independent wrong. What Happens If a Director Personally Guarantees a Company Loan? This is one of the clearest circumstances in which a director can become personally liable. Suppose a bank lends ₦100 million to ABC Limited and the managing director signs a personal guarantee securing repayment. If ABC Limited defaults and the terms of the guarantee make the director liable, the bank can enforce the guarantee against the director in accordance with its terms. The liability in that situation does not arise merely because the person is a director. It arises because the director separately assumed personal liability as a guarantor. Can a Bank Sue a Director for a Company Loan? Yes, where the director has a legally enforceable personal obligation, such as a guarantee. The bank must establish the basis of the director’s personal liability. A director who has not guaranteed the company’s debt does not ordinarily become personally liable simply because he or she participated in obtaining or approving the company’s loan. The loan agreement, guarantee, security documents and circumstances of the transaction must therefore be examined. Can a Director Be Personally Liable for Fraud Committed Through a Company? Yes. The corporate structure does not protect a director from personal liability for the director’s own fraudulent conduct. For example, where a director deliberately makes fraudulent representations to obtain money personally or causes company funds to be diverted through fraudulent conduct, the director can face personal consequences. The fact that the fraudulent conduct was carried out through a company does not transform the director’s own wrongful conduct into an act for which the director is automatically immune. Can a Director Be Personally Liable for Misusing Company Money? Yes. Directors occupy fiduciary positions and are required to act in the interests of the company. CAMA provides that directors are trustees of the company’s money, property and powers and are required to account for money over which they exercise control and refund money improperly paid away. A director who improperly diverts or misapplies company money can therefore face personal liability to the company. This is different from saying that every company debt becomes a director’s personal debt. The liability arises from the director’s own breach of duty or wrongful handling of company property. What Does Section 316 of CAMA 2020 Provide? Section 316 is particularly important. It addresses circumstances in which a company: receives money by way of a loan for a specific purpose; receives money or other property as an advance payment for the execution of a contract or project; or 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 person from whom the money or property was received for a refund of the money or property not applied for the specified purpose. The company’s own liability is not extinguished. This is an important statutory exception to the ordinary rule of
When Can a Shareholder Sue a Company Director in Nigeria?
A shareholder does not lose the right to seek legal protection simply because the company is managed by a board of directors. Where a director acts unlawfully, breaches a duty, misuses company assets, commits fraud or engages in conduct that unlawfully affects a shareholder’s rights, the law provides remedies that can be pursued in appropriate circumstances. However, a shareholder cannot sue a director for every wrong committed against the company. This distinction is important because a company is a separate legal person. Where the wrong is done to the company, the general rule is that the company itself is the proper party to sue. The Companies and Allied Matters Act 2020 (CAMA 2020), however, provides specific exceptions through personal actions, representative actions, derivative actions and remedies for oppressive or unfairly prejudicial conduct. This article explains when a shareholder can sue a company director in Nigeria and the circumstances in which the court can grant relief. Can a Shareholder Sue a Company Director? Yes, but the shareholder must establish a recognised legal basis for the action. A shareholder can bring proceedings against a director where the director has violated a right belonging personally to the shareholder. A shareholder can also, in appropriate circumstances, bring proceedings on behalf of the company through a derivative action where the wrong was committed against the company and the company itself has failed to take appropriate action. CAMA 2020 specifically provides mechanisms for members and other qualified persons to commence derivative proceedings. Sections 341 to 350 deal with actions by or against companies, protection of members and derivative actions. The nature of the wrong therefore determines the appropriate type of action. When Can a Shareholder Bring a Personal Action Against a Director? A shareholder can bring a personal action where the director’s conduct infringes a right belonging to the shareholder personally. Examples can include circumstances involving: unlawful interference with voting rights; improper treatment of the shareholder’s shares; conduct affecting rights attached to the shareholder’s membership; unlawful acts affecting the shareholder personally; or other breaches of rights recognised by law. The key question is: Was the shareholder personally wronged, or was the company wronged? If the shareholder was personally wronged, a personal action can be appropriate. If the company was wronged, the proper route will ordinarily be a derivative action or an action brought by the company itself. What Is a Derivative Action? A derivative action is an action brought by a shareholder or another qualified person on behalf of the company to remedy a wrong done to the company. This is important because the company, rather than an individual shareholder, normally owns the cause of action arising from a wrong done to the company. For example, suppose a director unlawfully diverts ₦100 million belonging to the company to a personal account. The immediate victim of the wrongdoing is the company. A shareholder cannot simply treat the ₦100 million as the shareholder’s personal money and sue for its recovery in a personal action. Instead, where the statutory requirements are satisfied, the shareholder can seek to bring a derivative action on behalf of the company. Why Would a Shareholder Need a Derivative Action? The derivative action exists because there are circumstances in which the company is technically the proper claimant but the people controlling the company are unwilling to sue. Consider a company with five directors. Suppose four directors have participated in diverting company funds for their personal benefit. The company is the proper party to recover the money. But the board controlled by those directors is unlikely to commence proceedings against itself. A derivative action provides a mechanism through which a qualified person can seek the court’s intervention to protect the company’s interests. What Does CAMA 2020 Provide About Derivative Actions? CAMA 2020 contains specific provisions governing derivative proceedings. Section 346 permits an eligible applicant to commence or intervene in proceedings on behalf of a company in circumstances prescribed by the Act. The court must consider the statutory requirements before allowing the action to proceed. Among the matters considered is whether the applicant is acting in good faith and whether bringing, prosecuting, defending or discontinuing the action appears to be in the best interests of the company. This means that a shareholder cannot commence a derivative action simply because the shareholder disagrees with a director. There must be a proper basis for invoking the statutory remedy. Who Can Bring a Derivative Action? CAMA 2020 gives the court jurisdiction to entertain applications from specified persons. Section 352 identifies an “applicant” for the purposes of the derivative-action provisions to include: a registered holder or beneficial owner of a security of the company; a former registered holder or beneficial owner; a director or officer, including a former director or officer; the Corporate Affairs Commission; and another person whom the court considers a proper person to make the application. The statutory definition is therefore broader than simply a current shareholder. What Must a Shareholder Establish Before Bringing a Derivative Action? The shareholder must satisfy the requirements prescribed by CAMA. The court considers, among other matters, whether the applicant is acting in good faith and whether the proposed proceedings are in the best interests of the company. The court can therefore prevent derivative proceedings from being used merely as a weapon in a personal dispute between shareholders. The applicant should be able to demonstrate a genuine corporate wrong and a legitimate reason why the company has not adequately pursued the matter itself. Can a Shareholder Sue a Director for Stealing Company Money? A shareholder can seek appropriate relief where a director has misappropriated company funds, but the proper procedure depends on who suffered the legal wrong. If the money belongs to the company, the company’s cause of action is ordinarily against the director. The shareholder should therefore consider a derivative action where the company is unwilling or unable to pursue the claim. The shareholder should not simply claim that the director stole “the shareholder’s money” because the shareholder owns shares in