COMPANY LAWS IN NIGERIA

INTRODUCTION COMPANY LAW IN NIGERIA

One of the obvious attractions of the corporate form to those wishing to run a business is the separate existence of company from its members and the limited liability of the latter. Although some creditors, usually large ones, may seek to leap over the barrier of limited liability by seeking personal guarantee of those involved in the business, there is no doubt that this doctrine does restrict the extent of the recovery which many creditors can achieve upon the company’ insolvency, at least if they have not been able to obtain a position of priority in relation to the company’s assets by taking an appropriate security


On the other hand the doctrine of limited liability encourages public investment on companies by those who do not have the time continuously thereafter to monitor the activities of the company’s management.

The argument in favour of Limited Liability Company was won decisively in nineteenth century. However the law has been left with the question of whether limited liability, although the normal situation, should also be incapable of exception, say, in case of “abuse” or in relation to group of companies, where the question is whether the single company or the group as a whole should be regarded as a legal entity.

With or without limited liability the existence of a company as a separate legal entity within which a number, sometimes a large number, of people have come together to effectuate a common purpose, raises question about how relations among this group are to be most effectively arranged and about how they are to organize the running of the business.

In addition, how is the company, an artificial entity which can act only when the acts of human being are attributed to it by law, to represent and bind itself against outsiders?

Finally the existence of this doctrine, by excluding creditor’s recourse to the assets of individual members or directors, forces the law to create special rule to protect the asset of the company for the benefit of the creditors.

LIFTING THE VEIL

What is generally described as “lifting the veil” has until quite recently aroused little attention and even less theoretical discussion in Nigeria. It is a favorite topic in USA where the veil is lifted more readily.

Nevertheless it has always been recognized that “ the legislature can forge a sledgehammer capable of cracking open the  corporate shell” and even without the aid of a legislative sledgehammer the courts have sometimes been prepared to have a crack. In cases where the veil is lifted, the law either goes behind the corporate personality to the individual members or directors, or ignores the separate personality of each company in favour of the economic entity constituted by a group of associated companies. The latter situation is often merely an example of the former, the individual members being corporate, rather than human, beings but even when that is so the two situations are worth distinguishing since there seems to be a greater readiness to lift the veil in the latter.

Before dealing with exceptional situations in which the veil is lifted, it should be emphasized that the veil never means that the affairs of the company are completely concealed from view. On the contrary, the legislature has always made an essential condition of the recognition of corporate personality with limited liability that it should be accompanied by wide publicity. Although third parties dealing with the company will normally have no right to resort against its members, they are nevertheless entitled to see who those members are, what shares they hold and in the case of a listed company, the beneficial interest in those shares if substantial. They are also entitled to see its official are( so that they know with whom to deal), what its constitution is, etc.

Normally, however, third parties are neither bound nor entitled to look behind such information as the law provides shall be made public; in addition to the veil of incorporation, there is something in the nature of a curtain formed by the company’s public file, and what goes on behind it is concealed from the public gaze. But sometimes this curtain may be raised. For example, an inspector may be appointed to investigate the company’s affairs, in which case he will have the widest inquisitorial powers; indeed he may even be appointed for the purpose of going behind the company’s registers to ascertain who its true owners are. It is not always so easy to decide whether one is faced with a true example of lifting the veil or with a raising of the curtain and some of the examples dealt with hereafter should perhaps be regarded as lifting the curtain (rather than the veil)

SOME OF THE EXAMPLES ARISING UNDER THE EXPRESS WORDS OF A STATUTE ARE:

Reduction of number of members:
Under section 24 of the COMPANY’S ACT, if a public company carries on business for more than six months with fewer than two members any person who is a member after that six months may become liable, jointly and severally with the company, for the payment of its debt. This rule is the final and probably now insupportable remnant of a legislative policy which attached significance to the number of members of a company as a protection for those who deal with it. The limited liability Act of 1855 applies only to companies with 25 members and as late as 1980 public companies had to have at least seven members. But the requirement was effectively undermined by the decision in Salomon’s case, and since parliament chose not to reverse the decision, the requirement of members has ever since be capable of being met through the use of bare nominees. The rule was all but abolished by the twelfth company law directives on single-member private limited liability companies which had the consequence that private companies limited by shares or by guarantee were excluded from section 24.

This section does not operate to destroy the separate personality of the company; it still remains an existing entity even though there is one member only, or, indeed, although there is none. And the rights which the section confers on creditors are limited. It is only the member who remains after the six months that can be sued. (not those whose withdrawal has led to the fall below the minimum) and then only if he knows that it is carrying on business with only one member and he is liable only in respect of debt contracted after the six months and while he was a member. The crowning anomaly is that liability attaches only to a member and not to a director unless he is as well a member.

Although the facts giving rise to a possible application of the section are of not infrequent occurrence, it seems rarely to be invoked, doubtless because of the limitations considered, and with the exclusion of most private companies from the scope of the section in 1992. It constitutes an exception to the general rule of theoretical interest rather than practical importance.

FRAUDULENT OR WRONGFUL TRADING

An example of far greater practical importance has long been afforded by provisions which, until 1986, were in section 332 of the companies Act 1948. This created a specific but widely defined criminal offence of carrying on the business of the company with intent to defraud. It further provided that, if the company was in the case of winding up, the court will declare that the culprits were to be personally liable, without limitation of liability, for all or any of the debt or other liabilities of the company to the extent that the court might direct. In the legislative reforms of 1985-1986 the criminal offence became section 458 of the Company’s Act but the civil sanction was moved to sections 213-215 of the insolvency Act 1986 and following the recommendation of cork committee extended to” wrongful trading” involving a lesser degree of moral culpability. It is with the later section that we are concerned with and they constitute what is probably the most extreme departure from the rule in Salomon’s case yet achieved in the United Kingdom.

These provisions recognize that the separate entity and limited liability doctrines are capable of being abused and that the benefit of them should be removed from the abusers. Abuse in the shape of hiding behind limited liability to effect fraud is easy to identify, as the long standing provisions against fraudulent trading indicate.

More significant are the recently added provision on wrongful trading which, in effect, make access to limited liability dependent upon objective standard of competence on the part of controller of companies, at least during the period when insolvency threatens and the controllers are under the greatest incentive to take advantage of companies creditors. As we shall see below, this statutory innovation has had a significant impact upon the court’s development of the general common law duty of care to which directors are subjects.

Section 231 dealing with fraudulent trading, is generally the same as the relevant provision of the former section 332 and decision on the later remain relevant. It provides that:
(1) If in the curse of the winding up of the company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose…”
Then;
(2) “The court on the application of the liquidator may declare that any persons who were knowingly parties to the carrying on the business in(that) manner are to be liable to make such contributions(if any) to the companies asset as the court think proper.”

Hence, unlike the criminal offence now in the companies Act, it applies only if the                   company is in liquidation and, in contrast with the former section332, application for the declaration can be made only by the liquidator. But the class of persons against whom the declaration can be made is far wider than member or directors. Hence the government when less reluctant than it now is to rescue “lame duck” and banks and parent companies have at times felt inhibited from providing finance to ailing companies, fearing that they may thereby fall foul of the provisions. Their fears, however, seems unfounded so long as they play no active role in running the company with fraudulent intent.

To establish that intent, what has to be shown is “actual dishonesty involving, according to current notions of fair trading among commercial men, real moral blame”. That may be inferred if “a company continues to carry on business and to incur debts at a time when there is, to the knowledge of the directors, no reasonable prospect of the creditors ever receiving payment of those debt”, but cannot be inferred merely because they ought to have realized it. It is this proves to prove subjective moral blame that led the Jenkins committee in 1962 vainly to recommend the introduction of a remedy for “reckless trading” and the cork committee, 20 years later, successfully to promote it under the name of “wrongful trading”.

Wrongful trading is dealt with in section 214 of the insolvency Act. It empowers the court to make a declaration similar to that under section 213 but only in one specific set of circumstance. It operates only when the company has gone into insolvent liquidation and the   declaration can be made only against the person who, at some time before the commencement of the winding up, was a director of the company and knew, or ought to have concluded, at that time, that there was no reasonable prospect that the company would avoid going into insolvent liquidation.

But the declaration is not to be made if the court is satisfied that the person concerned thereupon took every step with a view to minimizing the potential loss to the company’s prospect of avoiding insolvent liquidation, he ought to have taken. In judging what fact he ought to have known or ascertained, what conclusion he should have drawn and what step he should have taken, he is to be assumed to be a reasonable diligent person having both the general knowledge, skill and experience expected of a person carrying out his function in relation to the company and the general knowledge, skill and experience that he generally has.

There are in fact two questions that needs to be answered, both on an objective basis. Should the director have realized there was no reasonable prospect of the company avoiding insolvent liquidation and, once that stage has been reached, did the director take all the steps he or she ought to have taken to minimize the loss to the company’s creditors, especially, no doubt, by seeking to have the company cease trading? Both these judgment will depend heavily on the fact of each case: what sort of company was involved, what were the functions assigned to or discharged by the director in question, what outside advice was taken and what was its content?

Moreover, and this is of considerable importance for a number of reasons, for the purpose of section 214 “directors” includes “ shadow director”, i.e. a person, other than a professional adviser, in accordance with whose direction or instructions the directors of a company are accustomed to act. This considerably widens the class of persons against whom a declaration could be made. The two potential defendants of greates interest are, once again, banks and parent companies. Ass far as the former are concerned, the courts have so far taken a cautious line, on the ground that the definition of a shadow director required that the board cede its management autonomy to the alleged shadow director and that the taking of steps by the bank to protect itself does not include such a cession, if the company retains the power to decide whether to accept the restrictions put forward by the bank, even though the company may be thought to have no practicable alternative.

In relation to parent companies, such a degree of the cession of autonomy by the subsidiary may be more easily found, but much will still depend upon how exactly intra group relationships are established. The degree of control exercised by parent company may vary from detailed day to day control to virtual independence, with many variations in between. It would seem that the establishment of business guild lines within which the subsidiary has to operate would not make the parent inevitably a shadow director of the subsidiary.

Thus, whether the court will take the opportunity afforded by the wrongful trading provisions to rationalize the legal position of the group of companies remains to be seen.

Section 214 is expressly stated to be “without prejudice” to section 213 and there may well be cases where the circumstances will justify an application by the liquidator under both.

Indeed, section 215 contains certain procedural provisions common to both fraudulent and wrongful trading. Most of these repeat, in substance, provisions in the former section 332: for example, that on an application for a declaration, the liquidator may give or call evidence and that the court may add further directions for giving effect to any declaration it makes and in particular, may direct that the liability of any person against whom the declaration is made shall be a charge on any debt due from the company to him or on any mortgage or charge in his favour on assets of the company.
And both sections 213 and 214 have effect not withstanding that the person concerned may be criminally liable. What is new and valuable is that section 215 also provides that the court may direct that the whole or any part of the debt and interest thereon, owed by a company to a person against whom a declaration is made, shall be postponed to all other debts, and interest thereon, owed by the company.

It was accepted in Re Produce marketing that the jurisdiction under section 214 was primarily compensatory, in contrast to assessment under section 213 where a penal element may be appropriate.

The outer boundaries of the compensation are thus set by the amount by which the company’s assets have been depleted by the director’s conduct. Within that the court has discretion to fix the amount to be paid as it thinks proper. It seems that the contribution from the director is to the assets generally and not to the particular benefit of those who became creditors of the company during the period of wrongful trading. What is less clear is whether the contribution can be caught by a floating charge previously granted by the company. The better view is that it cannot, certainly, the opposite view will defeat the policy espoused by cork committee, which was to improve the position of the unsecured creditor. On the other hand the liquidator may be unwilling to sue except in the strongest cases, and if the contribution goes into the hands of the general creditors, the bank will have no incentive to fund it either.

ABUSE OF COMPANY NAME OR EMPLOYMENT OF DISQUALIFIED DIRECTORS

 The insolvency Act 1986 added further example of cases where the manager of a company may become liable for its debt and other liability. A common abuse has been for those responsible for the running of a company which had gone into insolvent liquidation to from another company, with an identical or very similar name, which bought the undertaken and other asset from the original company’s liquidation and in which they continued to trade.

At best this was likely to mislead and confuse customers, at worst it was a deliberate fraud. Section 216 of the insolvency Act now makes it an offence for anyone who was a director or shadow director of the original company at any time during the 12 months preceding its going into insolvent liquidation to be in any way concerned (except with the leave of the court or in such circumstances as may be prescribed) during the next five years in the formation and management of a company, or business, with a name by which the original company was known or one so similar as to suggest an association with that company, the first and the most important of the prescribed cases is where the successor company purchases the whole of the insolvent companies business from an insolvency practitioner acting for the company and gives notice of the name the successive company intends to use to all the creditors of the insolvent company. This suggests that the aim of the section is the protection of the creditors of the insolvent company rather than that of the new company. The insertion of the insolvency practitioner is intended to ensure that the sale by the insolvent company is not at an under value and the notice to the creditors ensures that they are not mislead into thinking that they may assert their own claim against the new company.

A person acting in breach of section 216 is, under section 217 personally liable, jointly and severally with that company and any other person so liable, for the debt and other liabilities of that company incurred while he was concerned with its management who acts or is willing to act on the instruction given by a person whom he knows, at that time to be in breach of section 216

Similar consequence applies to a person against whom a court order has been made under the company director’s disqualification Act1986.

Section 15 of the Act provides that if such a person acts in the management of the company in contravention of the order, both he, and any other person concerned with the management of that company who is willing to act on his instruction despite knowing he is disqualified are jointly and severally liable with the company for its debt contracted during that time.

It will be observed, that these sanctions though similar in their consequences to sections 213 -215 of the insolvency Act, differ from them in that they apply  without the need for application to, and declaration by, the court though the person concerned may apply to the court to be granted leave.
They differ also in that in that the sanctions apply to conduct, not in relation with the company that has gone into liquidation, but in relation to another company or business whether that or not goes into liquidation.

MIS-DESCRIPTION OF THE COMPANY

On ordinary agency principle the officers of a company will, of course make themselves personally liable, not withstanding that they are acting for the company, if they choose to contract personally; for example by not disclosing that they are acting on behalf of the company.

But the company’s Act has gone further. What is now section 349(4) of the company’s Act 1985 provides that if any officer of the company or other persons acting on its behalf:

“Signs or authorizes to be signed on behalf of the company any bill of exchange,          promissory   note, endorsement cheque or order for money or goods in which the companies name is not mentioned (in legible characters)…he is…liable to a fine and that he is further personally liable to the holder of the bill of exchange, promissory note , cheque or order for money or goods for the amount of it (unless it is duly paid by the company) “

The result of this is that if the correct and full name of the company does not so appear, the signatory will be personally liable to pay if the company does not. And it seems clear that it makes no difference that the third party concerned has not been misled by the description.

However, as a result of what is now section 27 of companies Act, the use of the authorized abbreviation “ltd” or  “plc” instead of the full prescribed suffix “limited” or “public limited company” (or the welsh equivalent) is permissible. And the abbreviation of company to “co” has been held to be acceptable.

Furthermore the holders conduct may estop him from enforcing the liability of the signatory; for example where he has written the document with the misdiscription and submitted it for signature. In any event the liability of the signatory is very important only if the company is insolvent.

If the signatory is authorized to act on its behalf, it will not escape liability, although misdescribed, so long as its identity can be established, and if the signatory is successfully sued, he will be entitled to be indemnified by the company.
On the company’s insolvency, however it affords the holder a remedy which may be wholly unmeritorious. It might be a useful reform to amend the subsection by affording a signatory a defense if he could establish that the holder had not been misled by the misdescription; the recent decision display a marked disinclination to apply the provision when that is so.

PREMATURE TRADING

Another example of personal liability in the companies act is in section 117(8). Under the section, a public limited company, newly incorporated as such, must not  “do business or exercise any borrowing power” until it has obtained from the registrar of companies, a certificate that it has complied with the provisions of the Act relating to the raising of the prescribed minimum share capital or until it has re-registered as a private company.

If it enters into any transaction in contravention of this provision, not only are the company as it on officer in default, liable to fines but if the company fails to comply with its obligation in that connection within 21days of being called upon to do so, the directors of the company are jointly and severally liable to indemnify the other party in respect of any loss or damage suffered by reason of the company’s failure to comply.
Whether this is a true example of lifting the veil is questionable; technically, it does not make the directors liable for the company’s debt but rather penalizes the directors for any loss the third party suffered as a result of the director’s default in complying with the section.

But the effect is likely the same. It is however unlikely to be invoked often since it is unusual for companies to be formed initially as a public company.

COMPANY GROUPS

Reference has already been made to the growth of groups of companies and to the failure of English company legislation to adapt adequately to this phenomenon. Nevertheless it has long been recognized that, in relation to financial disclosure, the phenomenon cannot be ignored if a true and fair view of the overall position of the group is to be presented and that accordingly when one company (the parent or holding company) controls others (the subsidiary and the sub- subsidiary companies) the parent company must present group financial statements as well as its own individual statement, thus avoiding the misleading impression which the letter alone might give.

Having taken this step and prescribed criteria for determining when a parent subsidiary relation was established, use of the concept was extended to other areas. A further complication aroused when it was thought desirable to provide for financial disclosure regarding some companies over which the degree of control was not such as to make them subsidiary within the meaning of the statutory definition.

This is not the place to describe in detail the highly technical statutory provisions. It suffixes to summaries briefly and ignoring many refinement and qualification, their general effect in the light of the changes resulting from the implication of the servant company law directive by the companies Act 1989 which introduced a distinction between parent and subsidiary undertaken (relevant in relation to financial statements) and holding company and subsidiaries (relevant to other statutory provisions)….

MISCELLANEOUS STATUTORY EXAMPLE

In addition to the forgoing examples culled from the companies and other related legislation, scattered throughout the statute book are to be found many examples of modification of the corporate entity principle. This is particularly the case under taxation; the Revenue, not surprisingly has been astute to secure the passage of legislation “capable of cracking open the corporate shell”. When this is being used for purposes of tax avoidance and has occasionally done so to mitigate the burden of taxation if a strict application of the corporate entity principle would be unduly harsh and inhibiting. Mostly, statutory inroad has been in relation to groups (using the companies act definition of holding and subsidiary companies or some lesser degree of common control) or to situation arising on a change of control. Illustrations of both occur in the  employment legislation relating to redundancy and unfair dismissal, under which changes of  employment within the group from one company to the other or as a result of mergers are not treated as breaking the period of continuous employment. Another illustration occurs in relation to rights under business tenancies. Under the landlord and tenant Act of 1954, as amended by the law of property Act1969, when either the landlord or the tenant is a company its right under the act may enure for the benefit of other companies in the group and reversing a decision in which the court has refused to lift the veil, an individual landlord may be able to recover possession if he requires it for the purpose of the business carried on, not by him, but by a company which he controls.

Nevertheless the court have generally been reluctant to construe a statute as lifting the veil unless compelled to do so by the clearest words of the statute. The classic illustration is the refusal of the house of lords in Nukes v. don caster amalgamated collieries to construe what is now section 427 of the companies Act 1985 as meaning that an order made there under transferring the property and liabilities of one company to another on a reconstruction could operate to transfer a contract of personal service; and this not withstanding that the section specifically provides that “property” includes property, rights and power of every description.

To lord Akin the contrary interpretation would have been “tainted with oppression and confusion” and would have subverted  “the principle that a man is not to be compelled to serve a master against his will…[which] is deep seated in the common law of this country”.
Yet, had the whole share capital of the transferor company being transferred instead of the  under taken, the man would have been compelled to serve what in reality, was a new master.

The employee is better protected by recognizing the continuation of the enterprise but providing him with right to payment for redundancy or unfair dismissal if he is not kept on. And this is now recognized in respect of transfer of the undertaken ( where the effect of the Nokes decision has been reversed) under the influence of EC social law.

UNDER CASE LAW

Efforts by the judges to lift the veil have in general been hamstrung by the Salomon’s case which finally destroyed the possibility of regarding a one man company as a mere alias of, or agent for, the principal shareholder. Perhaps, the most extreme illustration of a refusal to lift the veil is afforded by Lee v. Lee Air Farming Limited. There Lee for the purpose of carrying on his business of aerial top dressing had formed a company of which he beneficially owned all the shares and was sole governing director.

He was also appointed chief pilot pursuant to the company’s statutory obligation he caused the company to insure against liability to pay compensation under the work men’s compensation Act. He was killed in a flying accident.

The court of appeal of new Zealand held that his widow was not entitled to compensation from the company ( that is from the insurer s) since Lee could not be regarded as a worker ( i.e. servant) within the meaning of the Act.

But the Privy Council reversed that decision holding that Lee and his company were distinct personalities which had entered into contractual relationship under which he became, qua chief pilot, a servant of the company.

In his capacity of governing director he could on behalf of the company give himself order in his order capacity of pilot, and hence the relationship between himself, as pilot, and the company was that of servant and master. In effect, the magic of corporate personality enabled him to be master and servant at the same time and to get all the advantages of both (and of limited liability).

Nevertheless there have been exceptional cases in which the court  have been able to lift the veil and until recently there were perhaps signs of a greater willingness to do so. Indeed as recently as 1985 a judgement of the court of appeal declared that:

In our view the cases… shows that the court will use its power to pierce the corporate veil if it is necessary to achieve justice irrespective of the legal efficacy of the  corporate structure…

A view emphatically rejected by the court of appeal in the case of Adams v. Cape Industries Plc. In that important case the court in a mammoth judgment involving a number of issues, subjected lifting the veil to the most exhaustive treatment that it has yet received in the English (or Scottish) courts.

The fact of the case were somehow complicated but for present purposes it suffices to say that what the court had ultimately to determine was whether judgment obtained in the united state against Cape, an English registered company whose business was mining asbestos in s. Africa and marketing it worldwide would be recognized and enforced by the English court.

In the absence of submission to the foreign jurisdiction this depended on whether Cape could be said to have been “present” in the United States. On the facts the answer to that question depended upon whether Cape could be said to be present in the united states through its wholly owned subsidiary or through a company (C.P.C) with which it has close business links.

In contending that Cape had been present in the United States the plaintiff raised three arguments which are
1. The “single economic unit” argument
2. “The corporate veil” point
3. The agency argument

CONCLUSION

Where then does this leave “lifting of the veil’’? Well”, considerably more attenuated than some of us would wish. There seems to be three circumstances only which the court can do so. These are:
1.      When the court is construing a statute, contract or other document;
2.      When the court is satisfied that a company is a “merely facade’ concealing the true facts;
3.      When it can be established that the company is the authorized agent of its controller or its members, corporate or human.

And number 2 only is a true example of lifting the veil; in number one and three the separate personality of the company is not denied but the practical effect on the parties’ rights and liability is the same as if it had been. The court cannot lift the veil merely because it considers that justice so requires.
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