Can a director of a company be personally liable for a company that proceeds to carry out transactions knowing it cannot pay its debts? What does the creditor need to prove to the Court to obtain judgment against the director to claim personal liability for the debt owed?

Section 506(1) of Companies and Allied Matters Act (CAMA)  provides that a creditor can proceed against any person during the winding up of a company if it is found that such a person conducted transactions/business of the company in a  reckless manner or with an intent to defraud the creditors of the company or the creditors of any other person.

In Akinwunmi O. Alade v. Alic Nig. Ltd. & Anor (2010) LPELR-399(SC) the director of the company knew that the company was in debt, the company however proceeded to enter into a partnership with the Appellant and as a result of none disclosure of the state of affairs of the company by the director, it resulted to a breach of the partnership. The Court in its judgment found the director liable with the company. The Court stated that even though the director was not a party to the agreement, he not only failed its responsibility as a director to manage the affairs of the company  but also masterminded the committing of the fraud by the company and as such the veil of incorporation of the company had to be lifted to hold the director responsible for the fraud committed.

In Chief Bola Adedipe v. Sameindir Frameinendur CA/L/128/08, where a petitioner proceeded against a director of a company for recovery of sums due to him which the company diverted for personal use. The Petitioner filed an application to lift the veil of the company and the declaration of section 506 of CAMA. The Court held that proof of fraud beyond reasonable doubt is not needed to find a director or a person personally liable for the debt of a company under Section 506 of CAMA, but proof of actual dishonesty by the company. The Court further stated that what is to be proved here is the civil liability and not criminal liability of such a person for winding up proceedings. The Court held the director of the company liable for the acts of the company.

In Pantiles Investments Ltd (in liquidation) v. Winckler [2019] EWHC 1298 (Ch)  the Court held that what was needed to prove fraudulent trading (which is reflected in Section 506 (1) of CAMA of our law) is the knowledge of the fraudulent activities carried out.  Here, the Court held the sole director of a company liable for fraud, as she was a knowing party to an attempt to conceal the property and the proceeds of its sale from Appellant’s creditors from the outset. 

Where a company, during the Covid-19 pandemic, enters into a contract knowing that its financial liabilities may prevent it from making good on the contract, a creditor may proceed against the director of the company to personally pay the debts of the company owed him by invoking the provision of Section 506(1) of CAMA . For more on this, email amarachi@tonbofa.com