For both companies, discuss the conduct of each director indicating any duties they may have breached. Support your discussion with cases and sections of the Corporations Act.
The position that directors enjoy in a company is not easy to explain. They are professional men hired by the company to direct its affairs. Yet, they are not servants of the company. A director is in fact, a director or controller of the company’s affairs.[1] The Companies acts do not define their position.[2] The Nigerian Act[3] carries a definition under which directors are persons duly appointed by the company to direct and manage the business of the company.[4]
Directors have sometime been described as trustees, and sometimes as agents[5] but it does not matter as long as one understands their true position which is that of commercial men managing a trading concern for the benefit of themselves and of all other shareholders.[6]
It is clearly recognized that the directors are in the eyes of the law, the agents of company.[7] The general principles of agency, therefore, govern the relations of the directors with the company and of persons dealing with the company through its directors.[8] On the position of directors as trustees, the Nigerian Act[9] states that directors are trustees of the company’s money, properties, and their powers and as such must account for all the moneys over which they exercise control and shall exercise their powers honestly in the interest of the company and all the shareholders and not their own sectional interests.
Although, directors are not properly speaking trustees, they are treated in accordance with them because they are person selected to manage the affairs of the company for the benefit of the shareholders and hence, it is an office of trust[10] and some fiduciary duties arise from such office.[11] In this capacity, directors owe two specific duties to the corporation and its common shareholders: the duties of care and loyalty.[12]
The duty of care requires directors to exercise the care in the exercise of their duty as a director that an ordinarily prudent person would exercise under similar circumstances.[13] In order to comply with this duty, directors must review any and all material information before making a business decision.[14] After reviewing all of the relevant information, the directors must act with requisite care in the discharge of their duties.[15]
In the given fact situation, a question arises whether the directors were negligent or not. Mary, Janet and Fred are not liable as it perfectly acceptable for a director to trust the professional opinion of a co-director. Directors are not always required to examine the company’s accounting records, and may trust the managing director and the company’s accountants for such matters.[16] A director may reasonably rely on co-directors and officers of the company. Simon, however can be held liable for hiding information from the board and the shareholders and misrepresenting about the machines in the monthlu reports.
For both companies, discuss whether any or all of the directors could be liable to pay the creditors, if the company is unable to do so.
Discuss whether Alpha Ltd had a responsibility to disclose any of the events that occurred leading up to the demands for payment.
The concept of limited liability of separate corporate personalities is often exploited to create shams, in which case it is necessary that the corporate veil be lifted to ascertain the true nature of the company, and to determine liabilities[17]. In Adams v. Cape Industries Plc.[18], the court said that the one well-recognized exception to the rule prohibiting the piercing of the corporate veil was that of sham or creation of a façade, i.e. where the corporate structure is a mere façade, concealing the true facts and nature of arrangement. While there are no definite guidelines to determine when a corporate structure is a sham, it has to be construed from the facts and circumstances of each case[19]. In the given case, there is nothing to suggest that the corporate veil was a façade to protect the activities of the directors. Hence, they cannot be held personally liable to the creditors.
All the decisions taken by the shareholders, whether commercially good or bad, are all within their legitimate power. There were no underhand dealings which were hidden apart from the fact that the company reports said that the machines were not in use due to routine maintenance which in reality, the machinery was found to be not suitable and hence, was not used. This fact must have been revealed in the company reports as the shareholders and the board had a right to know about it.
If Frugal Bank Ltd and Last-stop Finance Ltd contest ownership of the same equipment under their charges, discuss the likely outcome.
If a surety has charged property but then grants a legal charge over the property to a second chargee, then if the first charge was a legal charge then it has priority over the second charge. If the first charge, however, is an equitable charge, in that case, then it has priority only if the second chargee had notice of the first chargee’s interest. If there are two equitable charges created over the same property, then they priority in the order of creation. It was held in Griffiths v. Yorkshire Bank plc[20] that equitable interests take priority in the order of creation.
In the given fact situation, it must be noted that the fixed charge was created much earlier and will have priority over the floating charge. Hence, Last Stop Finance Ltd. will have a clear priority over the claim of Frugal Bank Ltd.
If Frugal Bank Ltd seeks a winding up order against Alpha Ltd describe the procedure it should follow.
Creditor’s winding up is a liquidation procedure. It is initiated when the members of a company adopt a resolution for voluntary winding up without a statutory declaration of solvency by the company’s directors. The unsecured creditors have the right to appoint a qualified practitioner as the liquidator. This procedure is usually followed in the case of insolent companies. There is no involvement of the court required for initiating the use of this procedure. The creditors may appoint a committee to act with the liquidator. They can veto on any person appointed by the shareholders and this veto is effective unless the court orders otherwise.
[1] McCardie J. in Moriarty v. Regent’s Garage and Engg. Co. Ltd., [1921] I KB 423.
[2] Robert Pennington, Company Law (London: Butterworths, 1990) at 550.
[3] Companies and Allied Masters Act, 1990.
[4] See Gen. Ameze Guobardia, The Criminal Liability of Directors in failed banks in Nigeria, (1998, Journal of Business Law) 198.
[5] Bowen LJ in Imperial Hydropathic Hotel v. Hampson, (1883) 23 Ch D 1.
[6] Jessel MR. in Re Forest of Deam Coal Mining Co., (1878) 10 Ch D 450.
[7] Ferguson v. Wilson, (1886) 2 Ch App 77.
[8] Paul Davies, Gower’s Principles of Modern Company Law (London: Sweet and Maxwell, 6th ed, 1997) at 201.
[9] Section 283 of Companies and Allied Masters Act, 1990.
[10] York and North Midland Railway Co. v. Hudson, 22
[11] Palmer, Company Law (London: Stevenson and Sons Ltd., 21st ed. 1968) at 524.
[12] See Gen. Dennis J. Block, Nancy E. Barton, and Stephen A. Radin, The Business Judgment Rule: Fiduciary Duties of Corporate Directors 1 (Prentice Hall, 3rd ed., 1989)
[13] Palmer, Company Law (London: Stevenson and Sons Ltd., 21st ed. 1968) at 526.
[14] Smith v Van Gorkom, 488 A2d 858 (Del 1985).
[15] Aronson v Lewis, 473 A2d 805
[16] Dovey v. Cory, [1901] AC 477.
[17] Paul L. Davies, Gower’s Principles of Modern Company Law, (6th ed., London, Sweet & Maxwell, 1997)at 180, 181.
[18] Adams v. Cape Industries Plc [1990] 2 WLR 786 HL.
[19] Freewheels (India) Ltd. v. Veda Mitra AIR 1969 Del 258.
[20] [1994] 1 WLR 1427.
