Directors’ Liability Under Nigerian Law: When the Corporate Veil Will Not Protect You
Introduction
Under Nigerian company law, a company is recognised as a separate legal entity distinct from its shareholders, directors, and officers. This foundational principle, famously established in Salomon v. Salomon & Co. Ltd (1897) AC 22, allows a company to own property, incur liabilities, sue, and be sued in its own name. One major implication of this doctrine is that directors and officers are generally shielded from personal liability for the company’s acts.
However, this protection is not absolute. The law recognises circumstances in which directors and officers may be held personally liable, particularly where the corporate structure is abused. In such cases, courts may “lift” or “pierce” the corporate veil to reveal the individuals behind the company. This article examines director and officer liability under Nigerian law and the circumstances under which the corporate veil will be lifted.
The Legal Status and Duties of Directors and Officers
A. Statutory Duties Under CAMA 2020
The Companies and Allied Matters Act 2020 (CAMA 2020) codifies the duties and responsibilities of directors. Key provisions include
i. Section 305: Directors stand in a fiduciary relationship with the company and must act in utmost good faith in the best interests of the company. Subsection 3 provides that
“A director shall act at all times in what he believes to be the best interests of the company as a whole so as to preserve its assets, further its business, and promote the purposes for which it was formed, and in such manner as a faithful, diligent, careful and ordinarily skilful director would act in the circumstances and, in doing so, shall have regard to the impact of the company’s operations on the environment in the community where it carries on business operations.”
ii. Section 306: Directors must not place themselves in a position where their personal interests conflict with their duties to the company. The section provides that
“The personal interest of a director shall not conflict with any of his duties as a director under this Act.
(2) A director shall not— (a) in the course of management of affairs of the company, or
(b) in the utilisation of the company’s property, make any secret profit or achieve other unnecessary benefits…
III. Section 309: Legal positions of Directors. It provides that
“1) Directors are trustees of the company’s money, properties and their powers, and as such shall account for all the money over which they exercise control, refund any money improperly paid away, and shall exercise their powers honestly in the interest of the company and all the shareholders, and not in their own or sectional interests.
(2) A director may, when acting within his authority and the powers of the company, be regarded as an agent of the company under Part III of this Act.”
Breach of these duties may expose directors to personal liability, even where the company itself is a separate legal entity.
B. Officers of the Company
Officers such as company secretaries and senior management may also incur liability if they act beyond their authority, engage in fraudulent conduct, or knowingly facilitate statutory breaches.
C. General Rule on Corporate Personality
The general rule is that acts done by a company are the acts of the company alone. Directors are not personally liable for corporate debts merely because they manage or control the company, and Nigerian courts have consistently upheld this principle.
D. Circumstances Where the Corporate Veil Will Be Lifted
1 . Fraud and Improper Conduct
One of the most common grounds for lifting the corporate veil is fraud. Where a company is used as a vehicle to perpetrate fraud or evade legal obligations, the courts will hold the individuals behind it personally liable.
In Adeyemi v. Lan & Baker (Nig.) Ltd (2000) 7 NWLR (Pt. 663) 33, the court held that the veil of incorporation may be lifted where the company is a mere sham or façade concealing the true facts.
Similarly, Section 316 of CAMA 2020 provides that directors who knowingly carry on business in a fraudulent manner shall be personally liable for the debts and liabilities of the company. It provides that
- Where a company— (c) with intent to defraud, fails to apply the money or other property for the purpose for which it was received, every director or other officer of the company who is in default is personally liable to the party from whom the money or property was received for a refund of the money or property so received and not applied for the purpose for which it was received and nothing in this section affects the liability of the company itself.
2. Fraudulent Trading
Under Section 672 of CAMA 2020, directors may be held personally liable for fraudulent trading, and in such cases, the protection of separate corporate personality will not apply.
The section provides that
“If, in the course of the winding-up of a company, it appears that any business of the company has been carried on in a reckless manner or with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the Court, on the application of the official receiver, or the liquidator or any creditor or contributory of the company, may, if it deems proper to do so, declare that persons who were knowingly parties to the carrying on of the business in that manner, is personally responsible, without any limitation of liability for all or any of the debts or other liabilities of the company as the Court may direct.”
3. Agency or Alter Ego Doctrine
Where a company acts merely as an agent or alter ego of its directors or shareholders, the courts may lift the veil.
In Union Bank of Nigeria Plc v. Penny-Mart Ltd (1992) 5 NWLR (Pt. 240) 228, the court held that where a company is merely a conduit pipe, the court is entitled to look behind the corporate façade.
4. Statutory Exceptions
Certain statutes expressly impose personal liability on directors and officers. Examples include:
- Tax legislation under which directors may be held liable for unremitted taxes.
- Environmental laws that may impose liability for pollution or environmental damage, and matters that are criminal in nature.
5. Misrepresentation and Pre-Incorporation Contracts
Directors may be personally liable if they make false representations on behalf of the company or enter into contracts before the company is incorporated, unless the contracts are properly ratified.
6. Liability for Ultra Vires Acts
Although the doctrine of ultra vires has been largely relaxed under CAMA 2020, directors may still incur liability where they act outside the company’s objects or powers, and such acts result in loss.
E. Practical Implications for Directors and Officers
Directors and officers must appreciate that incorporation is not a license to engage in misconduct. Compliance with statutory duties, proper corporate governance, accurate record-keeping, and transparency are essential to avoid personal exposure.
Where companies are properly run, and directors act in good faith, courts are generally reluctant to lift the corporate veil. However, where the corporate structure is abused, the courts will not hesitate to hold individuals accountable.
Conclusion
While the doctrine of separate legal personality remains a cornerstone of Nigerian company law, it is subject to important exceptions. Directors and officers who engage in fraud, reckless trading, or abuse of corporate form risk personal liability. The lifting of the corporate veil serves as a crucial judicial tool to prevent injustice and ensure accountability.
For businesses, investors, and corporate officers, it is vital to understand these principles to manage legal risk and maintain sound corporate governance practices.