Directors and officers

Directors’ liability – failure to commence proceedings and trading while insolvent

If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?

There are no specific consequences for directors for failure to commence insolvency proceedings or carrying on business while insolvent. However, a director of an insolvent company who failed to take steps with a view to minimising the potential loss to the company's creditors knowing that the company would go into insolvent liquidation may, upon an application by the liquidator, be ordered by the court to make contributions to the assets of the company (section 673(1) of the Companies and Allied Matters Act 2020 (CAMA)).

Directors’ liability – other sources of liability

Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganisation actions? Can they be subject to sanctions for other reasons?

The directors and officers of a public company or company limited by guarantee who knowingly carry on business without having at least two members for more than six months shall be liable jointly and severally with the company for the debts of the company contracted during that period (section 118, CAMA).

Also, breach of a director’s fiduciary duties resulting in the insolvency of a company may, under section 305 of the CAMA, result in civil or criminal liabilities.

Under sections 668, 670, 671 and 672 of the CAMA, a director or corporate officer may be held liable for their company’s insolvency where:

  • it is shown that proper accounting books were not kept by the company during the two years immediately preceding the commencement of the winding up or the period between the company’s incorporation and the commencement of its winding up, whichever is shorter;
  • the company’s business has been carried on in a reckless manner or with the intent to defraud its creditors and any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property is deemed a fraudulent preference;
  • a director has misapplied, retained or become accountable for any money or property of the company or is guilty of misfeasance or breach of duty;
  • any part of the company’s property valued at 100,000 naira or more is fraudulently removed;
  • property is obtained on credit for and on behalf of the company under false pretences, which the company does not subsequently pay for; and
  • through misrepresentation, the consent of the company’s creditors is obtained in respect of company affairs.
Directors’ liability – defences

What defences are available to directors and officers in the context of an insolvency or reorganisation?

Directors will have a defence if:

  • they took every step with a view to minimising the potential loss to the company’s creditors;
  • they acted honestly and, in the circumstances in which the company’s business was carried on, the default was excusable;
  • they were unaware of the fraudulent way in which the company’s business was conducted;
  • there was no intent to defraud the company’s creditors;
  • there was no intent to conceal the company’s affairs or break the law;
  • they acted as a reasonably diligent and skilful manager, consulted, used or worked with other professionals and followed due process in their activities; and
  • in criminal cases, reasonable doubt is created by raising a defence of business judgment or a defence showing a lesser intent than the intent to defraud or perform gross criminal negligence.
Shift in directors’ duties

Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganisation proceeding is likely? When?

The duties that directors owe to the corporation do not shift to the creditors at all until a liquidator, receiver or administrator takes over the control and management of the corporation.

Directors’ powers after proceedings commence

What powers can directors and officers exercise after liquidation or reorganisation proceedings are commenced by, or against, their corporation?

In a winding up, once a liquidator is appointed to wind up the company, all the powers of the directors – except those that the members in a general meeting or the court or the liquidator or the committee of inspection or the creditors (in the absence of such a committee) as the case may be, permit to continue – will cease.

In a reorganisation, the powers of the directors and officers generally remain exercisable, although they may be affected by the reorganisation scheme.

Law stated date

Correct on:

Give the date on which the above content was accurate.

10 September 2020.