Scenario;
Halima Durosinmi has just been appointed as a director in XYZ Company, a Multi-national company operating in the heart of Lagos, Nigeria. Though excited and elated, Halima is however not so confident because she does not know or understand the duties of a director and as approached her lawyer to enlighten her.
The board of directors play a pivotal role in the governance and strategic direction of a company. Their decisions and actions significantly impact the company’s success and the interests of its shareholders. To ensure that directors act in the best interests of the company and its stakeholders, they are bound by fiduciary duties. These duties are fundamental to maintaining ethical governance and protecting shareholder interests.
Generally, the affairs of a company in Nigeria are regulated by the Companies and Allied Matters Act (CAMA), Cap C.20, Laws of the Federal Republic of Nigeria, 2020. Consequently, it is also CAMA that states the duties of directors in a company, without prejudice to the company’s Articles and Memorandum of association. Under CAMA, duties of directors can found in Section 305 (1-9) of the Act. It provides that –
- A director of a company stands in a fiduciary relationship towards the company and shall observe the utmost good faith towards the company in any transaction with the company or on the company’s behalf. The duty of care requires directors to act with the same care that a reasonably prudent person would take in a similar position. This means they must make informed decisions, attend meetings regularly, and stay updated on the company’s affairs. In Okeowo v Milgore[1], per Eso JSC held that a Director stands in a fiduciary relationship with the company and shall observe utmost good faith towards the company in any transactions with it or on its behalf.
- A director shall also act with utmost good faith and shall owe a fiduciary relationship when acting as agent of a particular shareholder or such shareholder is dealing with the company’s securities. Directors must act in good faith, meaning they should act honestly and with a sincere intention to act in the best interests of the company. This duty overlaps with the duties of care and loyalty but emphasizes the ethical and moral obligations of directors. In Allen v Hyatt, the directors of a company were held, on the facts of the case, to be the agents of the members and so to come under a fiduciary duty to the members to make full disclosure.
- A director shall act in the best interest of the company so as to preserve its assets, further its business and promote the purposes for which such company was formed. In Benard Longe v. First Bank of Nigeria Plc[2], the Supreme Court observed that a director is one who is appointed by the company “to direct and manage the business of the company.” It can be drawn from the observation of the court that in exercising the duties of directing and managing the business of the company, the directors shall do so in the best interest of the company. See also Haston (Nig.) Ltd. v. A.C. Plc[3], where the court held that “a director of the company has a duty to act in the best interest of the company.”
- The director in performing his/her duties shall act to provide the interest of the company’s employees and the company’s members. In the case of Hogg v. Cramphorn Ltd.[4], a loan granted by the directors of a company to certain trustees to enable the trustees purchase shares in the company was set aside as the loan was not made out with the single-minded purpose of benefitting the company.
- A director must exercise his/her powers for the purpose to which it was specified. The UK Supreme Court in Eclairs Group Ltd[5] expressed the fundamental nature of the responsibilities of directors to act for a proper purpose as follows:
“The rule that the fiduciary powers of directors may be exercised only for the purpose for which they were conferred is one of the main means by which equity enforces the proper conduct of directors. It is also fundamental to the constitutional distinction between the respective domains of the board and the shareholders.”
- A director shall not fetter his discretion to vote in a particular way. It was held in Clark v Workman that the Directors of a company must act strictly as trustees in carrying through transfers of shares, unfettered any undertaking or promise to any intending purchaser.
- A director who delegates his powers shall not delegate such power in such a way as to amount to an abdication of duty. In Shanowo & ors v Adebayo, it was held that certainly, a director is not expected to abdicate his responsibility, but he is undoubtedly entitled to rely on the judgment of responsible assistants with requisite training and expertise.[6]
- No provision shall relieve any director from the duty to act in accordance with this section or relieve him from any liability incurred as a result of any breach of the duties conferred on him. In Engineer Vassil Vassiler v. Paas Ind Ltd[7], the court stated that “a director who has fraudulently deceived the company, or who through, otherwise deliberately pursuing his own interest of or those of outsiders’ has failed to act in the company’s interest, cannot plead the approval of the general meeting as a defence to an action for breach of duty, breaches involving fraud on the minority is not rectifiable. Any breach of duty which result in the company performing an act which although lawful and intra vires but could not be done under the company’s article without some special procedure being carried out are not ratifiable.”
- All duties imposed on a director by the act shall be enforceable against the director by the company. Buckley L.J in Gramophone & Typewriter Ltd v. Stanley[8] stated that;
“This court has decided not long since that even a resolution of a numerical majority at a general meeting of the company cannot impose its will upon the directors where the articles have confided to them the control of the company’s affairs….”
The essence of the above provisions of CAMA provides that any company director must act in utmost good faith towards the company and ensure that their personal interest do not conflict with their duties as a director. For instance, the court in Olawepo V. S.E.C (2011)16 NWLR (Part 1272) page 122 stated that “a director has a continuing duty to acquire and maintain a sufficient understanding of the company’s business to enable him discharge his duties as a director”. The question of the duty of the director and whether it has been discharged must depend on the fact of each particular case the articles of association and the director’s role in the management of the company.
The Need for Strict Adherence and Compliance
Strict adherence to fiduciary duties is essential for several reasons:
- Maintaining Trust and IntegrityAdhering to fiduciary duties helps maintain trust between the board, shareholders, and other stakeholders.
- Legal and Financial ConsequencesFailure to comply with fiduciary duties can result in legal and financial consequences for both the directors and the company.
- Effective Corporate GovernanceCompliance with fiduciary duties is a cornerstone of effective corporate governance.
- Protecting Shareholder InterestsBy adhering to fiduciary duties, directors protect the interests of shareholders and ensure that the company’s resources are used efficiently and effectively.
In conclusion, the fiduciary duties of boards of directors are fundamental to the ethical and effective governance of a company. Strict adherence to these duties is crucial for maintaining trust, avoiding legal and financial repercussions, and ensuring the company’s long-term success. Directors must remain vigilant and committed to fulfilling their fiduciary responsibilities to safeguard the interests of the company and its stakeholders.
If you have any questions regarding fiduciary duties of Directors, please do not hesitate to contact us via info@aocsolicitors.com.ng
Note: This article is for educational purposes only and does not serve as legal advice.
[1] (1979) 11 S.C. 133
[2] (2010) 6 NWLR (Pt. 1189) 1 S.C.
[3] (2002) FWLR (pt. 119) 1476 at 1492
[4] (1967) Ch. 254
[5] Eclairs Group Ltd para 14
[6] (1969) NSCC 143
[7] (2002)FL WE Pt 19 418 CA
[8] (1908) 2 K.B 89 CA