Categories: Covid-19

by Tonbofa LP

Share

Categories: Covid-19

by Tonbofa LP

Share

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

STAY IN THE LOOP

Subscribe to our free newsletter.

Thank you for your message. It has been sent.
There was an error trying to send your message. Please try again later.

Don’t have an account yet? Get started with a 12-day free trial

Related Posts

View all

  • Special Purpose Acquisition Companies“SPACs” also known as blank check companies are duly registered public limited companies, formed to raise capital in an Initial Public Offering (“IPO”) with the purpose of using the proceeds to acquire one or more unspecified companies, businesses or assets (target companies) to be identified after the IPO. Spacs have been used […]

    Continue reading
  • One of the biggest problems faced by the Insurance Industry in Nigeria is lack of awareness. Most people are not aware of the existence of Insurance neither do they know its relevance. There are certain insurance policies that the Federal Government of Nigeria has made compulsory for every individual and business in the country to […]

    Continue reading
  • In order to promote the ease of doing business in Nigeria, the Nigerian Senate passed the Companies and Allied Matters bill which was assented to by President Muhammed Buhari in August 2020. The new Companies and Allied Matter Act (CAMA) repeals the old Companies and Allied Matters Act of 2004. These are some of the […]

    Continue reading
  • Financial technology has gained acceptance within the country to remain competitive in the financial services ecosystem. ​Financial companies (FinTech) have emerged to offer operational services to Banks and other financial institutions, and the public. Our focus in this article shall be on switches as a payment system. Operation Of Fintech Companies FinTech companies basically operate as Payment Service Providers that […]

    Continue reading