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Director and parent company liability

Liability

Under what circumstances can a director or parent company be held liable for a company’s insolvency?

A breach of a director’s fiduciary duties resulting in the insolvency of a company may, according to Section 279 of Companies and Allied Matters Act, occasion civil or criminal liabilities. Under Sections 495, 502, 505 and 506 of the act, a director may be held liable for a company’s insolvency where:

  • it is shown that proper books of accounts were not kept by the company throughout the two-year period immediately preceding the commencement of the winding up or between the incorporation of the company and the commencement of winding up, whichever is the shorter;
  • the company 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;
  • such directors have mis-applied, retained or become accountable for any money or property of the company, or are guilty of misfeasance or breach of duty;
  • any part of the company’s property valued at N100 or above, or debt due to or from the company is concealed;
  • any part of the property valued at N100 or above 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.

A parent company will also be liable where there is an agreement between the parent and its subsidiary that it will be liable in such a circumstance.

Defences

What defences are available to a liable director or parent company?

The following defences are available to a liable director or parent:

  • if he or she acted honestly and, in the circumstances in which the company’s business was carried on, the default was excusable;
  • if he or she was unaware of the fraudulent way that the company’s business was conducted;
  • if there was no intent to defraud the company’s creditors;
  • if there was no intent to conceal the company’s affairs or break the law;
  • if he or she acted as a reasonably diligent and skilful manager, consulted, used or worked with other professionals, and followed due process in his or her activities; and
  • in criminal cases, if reasonable doubt is created by raising a defence of business judgment, or a defence showing a lesser intent than the intent to defraud, or gross criminal negligence.

Due diligence

What due diligence should be conducted to limit liability?

To limit liability, directors must ensure that reasonable steps are taken to minimise the company’s exposure to potential losses. These reasonable steps must be taken in consideration of the directors’ duties (eg,  fiduciary care, skill and experience).

Directors must ensure that decisions in the interest of the company are taken in the light of the company’s current and updated audit and financial reports.

Independent legal and financial advice should be sought regularly to ensure compliance with the requisite legal regimes. It is advisable to take professional liability insurance before accepting an appointment as director.

Directors should keep previous and current records, and understand the business and industry peculiarities, regulations and the resulting risks assessments.

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