By ‘Femi D. Ojumu
This analysis examines the rationale for the removal of directors of public limited companies in two common law jurisdictions; Nigeria and the United Kingdom. It assesses case law and policy considerations in both countries, and further afield.
It is pertinent to first establish the preliminary foundations.
Section 4 (2) (a) and (b)of the Companies Act 2006, UK, defines a Public Limited Company or Plc. (the focus), as one limited by shares or limited by guarantee and having its certificate of incorporation expressly stating it is a public company; and in relation to which the requirements of the statute, former statutes as to registration and re-registration as a public company have been complied with on or after the relevant date. Section 58 (1) thereof establishes that a company that is a Public Limited Company must end with the words “public limited company” or the abbreviation “Plc.” A public company’s authorised minimum relative to the nominal value of its allotted share capital is £50,000 or the prescribed euro equivalent pursuant to section 763 (1) (a) and (b) therein.
In Nigeria, section 24 of the Companies and Allied Matters Act (CAMA) 2020 establishes a public company as any company, except a private company, with its memorandum of association clearly defining it as a public company. Also, section 27 (2) (b) thereto affirms N2, 000, 000 (Two million naira) as the minimum issued share capital therein.
A consideration of directors’ duties warrants an examination too. That’s because it is the breach of those duties, and the seriousness thereof, which will invoke civil or criminal sanctions and/or personal liability, and then, depending on the particular factual circumstances, removal as a director. Section 269 (1) CAMA 2022 defines a director as a person “duly appointed by the company to direct and manage the business of the company”; and section 269 (2) CAMA establishes a rebuttable presumption in favour of any person dealing with the company that all the persons described by the company as directors, whether executive or otherwise, are duly appointed.
Conversely, the Companies Act 2006 UK does not expressly define a ‘director.’ However, section 250 thereof establishes that it includes ‘any person occupying the position of director, by whatever name called. To that extent, the UK enactment examines the functionality of the role devoid of its nomenclature. Simply, therefore, a public company could characterise its directors as executive council members, governors, trustees etc, and they would still be recognised as such at law; so long as the role aligns with the company’s objects, articles and the minutiae of the said person’s employment contract.
In common law and equity jurisprudence, directors stand in a fiduciary relationship with the company they run and are mandated to act in utmost good faith relative to their direct and vicarious acts on behalf of the company. The statute reinforces this important principle and imposes stiffer obligations on directors.
Accordingly, directors are under a statutory duty to act strictly within their powers; promote the success of the company; exercise independent judgment; act with reasonable care, skill and diligence; avoid conflict of interests; neither accept bribes nor gifts which would not only compromise their objectivity but constitute legal infractions; declare their interests in proposed transactions and arrangements. Authorities for these claims are enunciated in sections 171, 172, 173, 174,175, 176 and 177 of the Companies Act 2006.
Apart from shareholders, directors’ duties are also owed to those who, within reasonable contemplation, may be affected by their acts or omissions. The case of Lonrho vs Shell Petroleum Co Limited [1981] 2 All ER 456, illustrates this point. The House of Lords (now UK Supreme Court), observed that the interests of the company ‘are not exclusively those of the shareholders but may include those of its creditors’.
The UK Insolvency Act 1986 also affirms this logic in that it imposes a positive obligation on directors to take every reasonable step to minimise losses to creditors whenever it becomes highly probable that a company faces inescapable insolvency.
The aforementioned UK Companies Act 2006 provisions, relative to directors’ duties, are pretty much reflected in sections 305 (1), (2), (3), (4), (5), (6), (7), (8) and (9); 306, 307, 308 and 309 of CAMA 2020. These include the director’s fiduciary duties to the company and acting in good faith; avoiding conflicting interests; not acting as directors in more than five companies; acting with due care and skill; acting, as the circumstances justify, as agents and trustees of the company’s assets, money, properties; exercising accounting duties et al.
An exception to the execution of directors’ duties is established in sections 588 (1), (2) and (3) CAMA 2020 is winding up cases. The court-appointed liquidator in that case steps into the shoes of the directors and assumes all their powers to institute or defend any action on behalf of the company, carry on the business of the company so far as it is maybe necessary for its beneficial winding up; settle all creditors in full, sell company property et al. The case of Ekeng vs Polaris Ltd [2021] 2NWLR 401 illustrates this point.
Having established directors’ duties above, attention turns to the infractions therein, which can not only trigger disqualification in both jurisdictions but also depending on the gravity, attract criminal sanctions, and civil and/or personal liability. The trigger for directors’ removal could arise internally from shareholders or externally from regulators and/or law enforcement institutions. Accordingly, if shareholders, whistleblowers, and officers are sufficiently concerned that directors are acting contrary to the contractual terms of their engagement and violating the articles and company’s objects, they could well seek to remove such officers to protect the company from financial and/or reputational meltdown.
Examples of such serious breaches could be a failure to provide a safe working environment, fraud, persistently failure to file and keep proper accounting records or foreign policy breaching trade embargoes against hostile nations. To put this in context, in 2020 the U.S. government imposed trade sanctions against 11 Chinese companies for alleged complicity in human rights violations in the Xinjiang province. The affected Chinese companies were restricted from purchasing American technology without a special licence. American company directors that violated the embargo faced criminal sanctions aside from probable disqualification!
Furthermore, the defence of ignorance of the law is generally untenable. This was established in Grupo Torras SA v AL Sabah (No 5) [2001] 1 CL 75; where it was stated that foreign persons who accept UK companies’ directorships must engage with the obligations emanating from those positions by the governing English law.
By virtue of section 288 CAMA 2020, a company may by ordinary resolution remove a director before the expiration of his period of office, notwithstanding and provisions to the contrary in the company’s articles or subsisting contract. The provision requires a special notice of any resolution to remove a director or appoint an alternative without breaching the said director’s fundamental rights to a fair hearing or his right to seek compensation for damages.
Similar provisions are contained in section 168 of the UK’s Companies Act 2006, UK, in that a company may by ordinary resolution at a meeting remove a director before the expiration of his period of office, notwithstanding anything in any agreement between it and him. A special notice is required of a resolution to remove a director under the section or to appoint somebody instead of a director so removed at the meeting at which he is removed. Equally, it provides that a person appointed director in place of a person removed is treated, for the purpose of determining the time at which he or any other director is to retire, as if he had become director on the day on which the person in whose place, he is appointed was last appointed a director. Again, neither provision constrains the rights of the director so removed from seeking compensation for damages in court on the merits therein.
Important authorities to examine in this context include Colin Gwyer & Associates Ltd and Another vs London Wharf (Limehouse) Ltd [2002] EWHC 2748 (Ch), where the High Court ruled that a director who showed “willful blindness” to creditors and the company’s interests violated his fiduciary duty to the company. In Item Software (UK) Ltd v Fassihi [2002] EWHC 3116 (Ch), it was held that a director has a heightened duty to expose a breach of duty. The facts are short. A director failed to disclose an interest in a commercial venture in which he had a direct interest. This constituted a fraudulent concealment and the company was entitled to recover damages from the director. The inference here is that the circumstances of these cases constitute the basis for the removal of erring directors and that they also could be sued in their personal capacities.
To conclude, directors exercise significant responsibilities in the proper running of public companies and must ensure that the overriding aims of effective organisational performance, consistently optimising value for shareholders, regulatory compliance and acting with utmost good faith are non-negotiable to maximise their market appeal and competitiveness. Plus, the sanctions for non-performance and director’s negligence are only too stark as illustrated above.
Ojumu is Principal Partner at Balliol Myers LP, a firm of legal practitioners in Lagos, Nigeria.
