Barr, Chigozie Ezekiel.
victorezekielc@gmail.com
The principle of corporate sovereignty is such that the courts will not
interfere in the internal affairs of a company, because it should be within the
competence of most of the shareholders to determine their company's course and
direction.
This is also known as the majority rule which is in line with the rule in
Foss v. Harbottle.
THE SCOPE OF THE RULE IN FOSS v.
HARBOTLE (1843) 2 HARE 461
The facts of the case is that F. and T. were shareholders in a company
which was formed to buy land for use as a pleasure park. The defendants were
the other directors and shareholders of the company. F. and T. alleged that the
defendants had defrauded the company in various ways, and in particular that
certain of the defendants had sold land belonging to them to the company at an
exorbitant price. F. and T. now asked the court to order that the defendants
make good the losses to the company.
The Court held that since the company’s Board of Directors was still in
existence, and since it was still possible to call a general meeting of the
company, there was nothing to prevent the company from obtaining redress in its
corporate character and that the action of F. and T. could not be sustained.
The Rule is that in an action to remedy any wrong done to the company
or where irregularity has been committed in the course of a company’s affairs
the proper plaintiff is prima facie the
company itself – section 299 of
Companies and Allied Matters Act (CAMA) Cap. C20 LFN, 2004. Also, where the
alleged wrong is an irregularity which might be made binding on the company by
a simple majority of members, no individual member can bring an action in
respect of the irregularity – Edwards v. Halliwell (1950) 2 All ER 1064, Per
Jenkins L. J. Also, in Abubakari
v. Smith (1973) 6 SC 31, where the
Supreme Court held that based on the rule in Foss v. Harbottle, the action must fail as the claimant sued in a
personal capacity and did not join the association, as it was the association
that should have been sued and not individuals; Yalaju - Amaye v.
Associated Registered Engineering Contractors Ltd. [1990] 4 NWLR (Part 145) 422;
Edokpolor and
Co. Ltd. v. Sem-Edo Wire Industries Ltd. (1984) 15 NSCC 553.
The rule is also concerned with
the procedure for the enforcement of the right of a company. The rule is sequel
to the corporate personality principle that the company is separate and
distinct from the members. Thus, where a wrong is done to the company by the
directors, members or even outsiders, the company is the proper party to bring
an action to remedy the alleged wrong. A shareholder or minority shareholders
that have brought an action on behalf of the company cannot sustain the action
by operation of the rule except it falls within any of the exceptions.
The rule is otherwise known as
the majority rule because in deciding whether or not sue for an alleged wrong
done to the company, it is the majority that decides and not the minority and
the decision of the majority represents that of the company.
However, powers of the majority
rule extend to every facet of the company’s affairs. The majority of members have power to:
1. Alter the Memorandum and Articles
of Association of the company.
2. They appoint and dismiss the
directors.
3. If they so desire, they can put
an end to the business.
The rule has
been held to apply not only to incorporated bodies but also to unincorporated
associations. It was accordingly applied to trade unions in Cotter v. National Union of Seamen (1929) 2
CH. 58; and Mbene v. Ofili (1968)
1 ALR COMM. 235 on the ground that it was a body possessing a
Constitution or a set of rules and regulations entitling it to sue and be sued
as a legal entity.
JUSTIFICATION OF THE RULE
Several justifications have been
put forward for the rule, but the following may be noted –
1.
The reluctance of the court to interfere in the
internal affairs of the company. The courts would leave any irregularity to be
corrected by the majority of members of the company when such irregularity
relates to the internal affairs of the company.
2.
The rule avoids multiplicity of suits. Any suit
at the instance of the minority and no matter how meritorious is wasteful as
long as the majority members do not support it. Thus, the court will not
interfere with irregularities at meetings at the instance of a shareholder – MacDougall
v. Gardiner (1875) 1 Ch. D. 13, where
a minority action was rejected because if there was a wrong committed by the
chairman, the proper plaintiff was the company.
3.
The court should allow the will of the majority
within a company to prevail as against that of the minority. If the management
of the company is subjected to the whims and caprices of the minority, the
internal management of the company will be very difficult. Thus, the minority
must always be guided by the actions of the majority. The practice makes for
good democracy in the corporate management.
4.
Since the company is separate and distinct from
the members, any wrong committed against the company should be remedied by the
company acting through the majority.
5.
Finally, the rule is justified on the ground of
judicial policy which emphasizes that the courts will normally not judge
intra-corporate disputes, if the majority of the shareholders decide that the
matter will not be made a subject of litigation.
The rule has been applied to a
number of cases in Nigeria. For example, Nigeria Stores Workers Union v. Uzor (1971)
2 ALR (Comm) 412; Omisade v. Akande (1987) 2 NWLR (Pt. 55) 158; and most
especially in Tikatore Press Ltd. v. Abina (1973) 1 All NLR 401, where the
directors of a company allotted shares to themselves following the death of the
majority shareholder to enable them gain control of the company by becoming the
majority shareholders. The administrator of the deceased shareholder sought a
declaration that the allotment was ultra
vires and therefore of no effect. The court upheld the argument of the
defendant’s counsel that though the allotment was ultra vires, but the action
of the directors was an internal irregularity which the majority could either
ratify or overlook.
EXCEPTIONS TO THE RULE IN FOSS v. HARBOTTLE
This is provided for under section 300 of CAMA, which deals with
cases of minority protection. Thus under the exceptions, a single shareholder
can challenge the action of the majority to redress a wrong committed on the
company or which has negatively affected the rights of the minority
shareholders.
The exceptions are as follows –
1.
Illegal
or ultra vires transaction or act – A
minority shareholder or an individual can sue or restrain an ultra vires transaction. He can also
seek for a declaration that an act of the directors is more than a mere
irregularity which the company can ratify through the majority – section 300(a) of CAMA. In Parke v. Daily News
[1962] All ER 929; [1962] Ch 927; [1962] 3 WLR 566,
Majority shareholders wanted to share an asset belonging to the company. After,
the sale, they wanted to distribute the proceeds among employees being laid
off. The minority shareholder went to court to seek a declaration that the gift
to the employees who were to be redundant was an ultra vires gift, and the company was restrained.
2.
Doing an
act required to be done by a special majority or a simple majority – If the
constitution of the company or the Act requires an act to be carried out by a
special majority, for example, through a special resolution; if the act is done
by a simple majority through an ordinary resolution, the minority can bring an
action to remedy the breach of the Articles or provisions of the Act – section 300(b) of CAMA. In Baillie
v. Oriental Telephone Co. (1915) 1 Ch. 503, an action brought by a minority
shareholder was allowed to restrain a company from acting on a special
resolution of which an insufficient notice had been given.
3.
Where an
act or omission affects the personal rights of a member – This is under section 300(c) of CAMA. The section is
a restatement of the common law position whereby if the personal and individual
rights of membership have been invaded, the rule has no application. Where the
individual rights of members have been infringed by the company or the
directors by an act or omission, of course, such a member(s) can bring an
action seeking for redress – Pender v. Lushington (1877) 6 Ch. D 70, where
an action was brought by a shareholder whose vote was rejected on behalf of
himself and all others who had voted for him for an injunction to restrain the
directors from acting on the footing of the votes being bad. The court held
that the plaintiffs were entitled to an injunction to restrain the company from
acting on the resolution.
It should,
however, be noted that section 301 of CAMA
provides that if the application is granted, such aggrieved member shall not be
entitled to damages but to declaration or injunction restraining the company
from doing a particular act.
4.
Fraud on
the Minority or the Company – If fraud is committed on the company or the
minority shareholders and the directors fail to take an appropriate action to
redress the wrong, the minority can maintain an action against the directors or
the company. The act complained of need not involve actual commission of fraud
– section 300(d) of CAMA. In Cook
v. Deeks (1916) 1 A. C 554, a minority shareholders action was
allowed to compel the directors to account to the company for the profits made
out of a construction contract, which they took in their own names. Also, in Daniels
v. Daniels (1978) 2 All ER 89, the minority shareholders of a company
were allowed to bring an action against the company and the directors where the
directors had authorized the sale of a company land to one of them at a price
alleged to be below the market value. Lastly, in Prudential Assurance Co. Ltd. v.
Newman Industries Ltd (No. 2) (1982) Ch. 204, a minority shareholder’s
action was allowed against a fraudulent conspiracy of two directors of the
company in inducing the company to buy shares of another company at an over
valued price.
5.
Where a
company meeting cannot be called in time – A minority action is allowed
where a company’s meeting cannot be called in time to be of practical effect to
redress a wrong done to the company – section
300(e) of CAMA. This exception was given judicial imprimatur (approval) in the case of Hodgson v. National & Local
Government Officers Association (1972) 1 WLR 130, where it was held
that where a company meeting cannot be called in time to be of practical effect
to redress a wrong done to the company or to a minority, action on behalf of
the company or individual shareholder will lie.
6.
Where the
directors are likely to derive a profit or a benefit (section 300(f) of CAMA) –
A minority action is maintainable where the directors are likely to derive a
profit or benefit or have profited or benefited from their negligence or from
their breach of duty. It was held in Daniels v. Daniels (supra), that an
action would lie against directors who have profited from their negligence,
even if fraud is not proved. Also, in Alexander v. Automatic Telephone Co. (1900)
2 Ch. 56, a minority action was allowed where the directors benefited
from a breach of their duty, even though fraud was negative or not proved.
Persons that can sue as members
under sections 300 and 301 of CAMA include the personal representative of a
deceased member and any person to whom shares have been transferred or
transmitted by operation of law – section
302(a) & (b).
RELEVANT PETITIONS TO CAC, RESOLUTIONS AND
COURT PROCESSES RELATING TO THE INSTITUTION OF MINORITY ACTIONS AT THE FEDERAL
HIGH COURT
Derivative
Action
Application may be made to court for
leave to bring an action in the name or on behalf of the company or to
intervene in an action to which the company is a party for the purpose of
prosecuting, defending or discontinuing the action on behalf of the company – sections 303 – 309
of CAMA.
In
connection with an action brought or intervened under section 303 of CAMA, the
court may at any time make any such order or order, as it thinks fit – section 304 of CAMA.
Relief
on Grounds of Unfairly Prejudicial and Oppressive Conduct
A member who alleges that the affairs
of the company are being conducted in a manner oppressive or unfairly
prejudicial to a member or members may apply to court for relief by petition – section 310, and section 311
of CAMA;
Ijale Properties Ltd. v. Omololu-Mulele
[2000] FWLR (Pt. 5) 709. In this case, the allegation was by
minority shareholder, and the minority shareholders stated that
since the company
was incorporated, they had not held a single meeting, not filed returns, no
auditors or company
secretary.
The court
held that this was a clear case were section 311 of CAMA
could be invoked as a basis of action.
It
should be noted that the same powers under section 311 are conferred on personal representative
and also, the CAC may petition the court on the grounds.
Under section 312, one can ask for a specific order or a general order (omnibus order) to control how the company
will run in the future. The court may regulate the company's affairs for the future.
The court may
restrain the doing of or the continuing of prejudicial acts. Or order the doing
of a specific thing. The court may direct an investigation to be made by CAC that the company
be wound up.
There are 3 capacities in which an
action can be brought:
1. Personal;
2. Representative;
and
3. Derivative.
An aggrieved
minority can bring one action or combine the three types of actions i.e. personal, derivative and representative actions.
FINANCIAL STATEMENTS
The financial statements of a
company are its bills of health. The financial statements show the annual state
of affairs of the company and they are vital and of crucial importance not only
to members of the company but also to third parties dealing with it.
The financial statements enable a
member to know if his investments are growing or depreciating and whether to
sell off or retain his shares in the company; the statements also provide a
potential investor with information which would either persuade him to invest
or dissuade him from investing in a particular company.
DUTY TO PREPARE FINANCIAL STATEMENTS
The directors must, in respect of
each financial year of a company, prepare financial statements for the year – section 334(1) of CAMA. This includes –
(a)
Statement of the accounting policies;
(b)
The balance sheet as the last day of the financial
year;
(c)
A profit and loss account or, in the case of a
company not trading for profit an income and expenditure account for the
financial year;
(d)
Notes on the accounts;
(e)
The auditor’s report;
(f)
The director’s report;
(g)
A statement of the source and application of
fund;
(h)
A value added statement for the financial year;
(i)
A five year financial summary; and
(j)
In the case of a holding company, the group
financial statement – section 334(2) of
CAMA.
FINANCIAL STATEMENTS OF A PRIVATE COMPANY
A financial statement of a private
company need not include the following –
1.
Statement of the accounting policies;
2.
Statement of the source and application of fund;
3.
Value added statement for the financial year;
and
4.
A five year financial summary – section 334(3) of CAMA.
PUBLICATION OF FINANCIAL STATEMENTS
A company publishes its financial
statements when the financial statements laid before the company in general
meeting are delivered to the Commission and section 354 indicates that a company publishes its full account
when the complete statements laid before the company in general meeting are
also those delivered to the Commission.
However, where a company is
entitled to publish abridged financial statements, it needs to publish only the
balance sheet or profit and loss account, otherwise than as part of full
financial statements to which section 354 applies – section 355(1) of CAMA.
Where a company publishes full
financial statements, it must publish the relevant auditor’s report with them –
section 354(2) of CAMA, and where
appropriate, its group financial statements – section 354(3) and (4) of CAMA.
DUTY TO LAY AND DELIVER FINANCIAL STATEMENTS
In respect of each year, the
directors must at a date not later than eighteen (18) months after
incorporation of the company and subsequently once at least in every year, lay
before the company in general meeting copies of the financial statements of the
company made up to a date not exceeding nine (9) months previous to the date of
the meeting – section 345(1) of CAMA.
In respect of each year, the
directors shall deliver with the annual return to the Commission a copy of the
balance sheet, the profit and loss account and the notes on the statements
which were laid before the general meeting – section 345(3) of CAMA.
A company’s balance sheet and every
copy of it which is laid before the company in general meeting or delivered to
the Commission shall be signed on behalf of the board by two of the directors
of the company – section 343(1) of CAMA.
PERSONS ENTITLED TO RECEIVE FINANCIAL STATEMENT
A copy of the company’s financial
statements for the financial year must, not less than twenty-one (21) days
before the date of the meeting at which they are to be laid, be sent to each of
the following persons –
1.
Every member of the company (whether or not so
entitled);
2.
Every holder of the company’s debentures
(whether or not so entitled); and
3.
All persons other than members and debenture
holders, being persons so entitled – section
344(1)(a)(b) & (c) of CAMA.
In the case of a company not
having a share capital, a copy of financial statement may not be sent to a
member who is not entitled to receive notices of general meetings of the
company, or to a holder of the company’s debentures who is not so entitled – section 344(2) of CAMA.
AUDITORS
The position of auditors is very
important in a company. An auditor has enormous powers under the Act. His
position and duties are meant to safeguard the interests of the company and
investors by certifying compliance with the provisions of the law in relation
to preparation of accounts and others.
Where the company operates in
contravention of the laws and basic accounting principles or rules recognized
by the Act, the auditor may qualify his statutory report or even refuse to
certify the accounts.
However, the Act does not define
an auditor.
APPOINTMENT OF AUDITORS
The Act requires every company to
appoint an auditor or auditors at each general meeting to audit the financial
statement of the company and to hold office from the conclusion of that meeting
until the conclusion of the next annual general meeting – section 357(1) of CAMA; Avop Plc.
v. A. G Enugu State (2000) 7 NWLR (Pt. 644) 260 at 276.
He is appointed for the purpose
of carrying out a private audit on the activities of the company and to make
his comments thereon – R. v. Shacter (1960).
A retiring auditor may be
re-appointed at an annual general meeting without passing any resolution to
that effect unless he is not qualified for re-appointment or a resolution has
been passed at that meeting appointing another person or that he shall not be
appointed at all or if he has given a notice in writing to the company that he
is unwilling to be appointed – section
357(2) of CAMA.
The directors of a company have
the power to appoint a person as an auditor to fill a vacancy where no auditor
is appointed or re-appointed – section
357(3) of CAMA.
The company at a general meeting
may remove any auditor so appointed by directors and appoint in their place any
other persons who have been nominated for appointment by any member of the
company and of whose nomination notice has been given to the members of the
company not less than fourteen (14) days before the date of the meeting – section 357(5) of CAMA.
The first auditors may also be
appointed by the company in general meeting if the directors fail to exercise
their power to appoint the first auditors – section 357(5)(b) of CAMA.
A person is only qualified to be
appointed an auditor if he is a member of a body of accountants established
under an Act of the National Assembly in Nigeria – section 358(1) of CAMA. However, an officer or servant of the
company, a person or a firm who offers professional services to the company in
respect of taxation, secretarial or financial management and a body corporate
are disqualified from being appointed as auditors of the company – section 358(2) of CAMA.
Any person who knowingly acts as
an auditor in contravention of the Act is guilty of an offence and liable to
pay a fine of N500 and, for continued contravention, to a daily default fine of
N50 – section 358(6) of CAMA.
DUTIES OF AUDITORS
This is provided for under section 360 of CAMA. The duties of the
auditor generally depend on the provisions of the Act and the Articles of the
company. The duties are as follows –
1.
He has a duty to write a report in form of an
audit report on the accounts of the company as examined by him.
2.
He has a duty to carry out proper investigations
to enable him form an opinion on the proper accounting records that have been
kept by the company and whether the company’s balance sheet and profit and loss
account are in agreement with the accounting records and returns.
3.
He has a duty to include in his report
particulars of non-compliance with the provisions of the Act concerning
preparation and presentation.
4.
He has a duty to consider the directors report
and say whether or not the report is consistent with the accounts for the
period to which the report relates.
5.
He has a duty to report to the members of the
company and the audit committee, in case of a public company, on the accounts
examined by him.
6.
He has a duty to ascertain and state the true
financial position of the company by an examination of the books of the company
– Re
London & General Bank (No. 2) (1895) 2 Ch. 673, per Lindley L. J; Leeds
Estate Co. v. Shepherd (1887) 36 Ch. D 787.
7.
He has a duty to act honestly and with
reasonable care and skill. He must be honest and display a reasonable degree of
skill and care in the performance of his duties – Re Kingston Cotton Mill Co. (No.
2) (1896) 2 Ch. 279 at 288.
LIABILITY OF AUDITORS
An auditor will be liable for his
negligent acts which have resulted in a loss or damage of the company – section 368(2) of CAMA.
However, an auditor will not be
liable for negligence when a fraud has been committed through a well-laid out
scheme which did not arouse any suspicion on the part of the auditor to make
further or better investigations – Re City Equitable Fire Insurance Co. Ltd
(1925) Ch. 407. In Re Kingston Cotton Mill (supra) at 683, per
Lopez L. J, it was stated that the auditors are not liable for not
tracking out ingenious and carefully laid schemes of fraud where there is
nothing to arouse their suspicion.
REMOVAL OF AUDITORS
An auditor may be removed by the
company at any time before the expiration of his term by an ordinary resolution
of the company. He can be removed in the foregoing manner not withstanding
anything to the contrary in any agreement between him and the company – section 362(1) of CAMA.
When an auditor has been removed,
the company has a duty to give notice of his removal to the Corporate Affairs
Commission within fourteen (14) days of the passing of the resolution leading
to the removal of the auditor. Failure to do so makes the company and its
officer who is in default guilty of an offence and liable to a daily fine of
N100 – section 362(2) of CAMA.
Any auditor so removed shall not
be deprived of any compensation or damages that he may be entitled to by reason
of the termination of his appointment as an auditor.
AUDIT COMMITTEE
Section 359(3) of CAMA provides that in addition to the report made
to the members of the company on its accounts, the auditors shall in the case
of a public company, also make reports to an Audit Committee which shall be
established by the public company. Thus, it is only required in a public
company.
It can be said that the institution
of Audit Committees is part of the continuous effort to balance the interest of
the shareholders and the public on the one hand against those of the board and
management on the other hand.
However, it is advisable that the
committee should not act as a barrier between the auditors and the executive
directors of the board or encourage the board to abdicate its responsibility in
reviewing and approving the financial statements.
It should also not be under the
influence of any dominant personality on the board; neither should it get in
the way of or obstruct executive management.
The main duty of Audit Committee
is to examine the auditor’s report and make recommendations thereon to the
annual general meeting as it may think fit – section 359(4) of CAMA.
COMPOSITION OF AUDIT COMMITTEE
The Audit Committee shall consist
of an equal number of directors and representatives of shareholders of the
company (subject to a maximum number of six (6) members) – section 359(4) of CAMA.
The Audit Committee should be composed
of strong and independent persons with not more than one (1) executive.
A member should, inter alia, be able to read and
understand basic financial statements and be capable of making valuable
contributions to the committee.
A majority of the non-executives
should be independent of the company, that is, independent of management and
free from any business or other relationships which could materially interfere
with the exercise of their independent judgment as members of the committee.
The chairman should be a
non-executive director, to be nominated by members of the committee. The term
should be fixed and definite but a member may be re-elected.
The company secretary shall be
the secretary of the committee.
FUNCTIONS OF AUDIT COMMITTEE
This is provided for under section 359(6) of CAMA which provides
thus:
“Subject
to such other additional functions and powers that the company’s articles of
association may stipulate, the objectives and functions of the audit committee
shall be to –
a)
Ascertain whether the accounting and reporting
policies of the company are in accordance with legal requirements and agreed
ethical practices;
b)
Review the scope and planning of audit
requirements;
c)
Review the findings on management matters in
conjunction with the external and departmental responses thereon;
d)
Keep under review the effectiveness of the
company’s system of accounting and internal control;
e)
Make recommendations to the Board in regard to
the appointment, removal and remuneration of the external auditors of the
company; and
f)
Authorize the internal auditor to carry out
investigations into any activities of the company which may be of interest or
concern to the committee.
ANNUAL RETURNS
Every company either limited by
shares or guarantee, is required to make and deliver to the Commission annual
returns in the prescribed form – section
370 of CAMA. However, a company may not make and deliver annual returns if
it is the year of incorporation of the company or is not to hold an annual
general meeting in the following year under section 213 of CAMA.
The annual returns must be
accompanied by a certified copy of the balance sheet and profit and loss
account of the company as laid before the general meeting, the report of the
auditors on, and of the report of the directors – section 375 of CAMA.
Private companies are required to
submit their annual returns together with a certificate signed by both the
director and the secretary to the effect that since the last annual return or
incorporation in case of a new company, the company had not issued any
invitation to the public to subscribe to any of her shares or debentures – section 376(1) of CAMA.
Non-compliance with the
provisions relating to the filing of annual returns makes the company, every
director or officer of the company guilty of an offence and liable to pay a
fine of N1,000 in the case of a public company, and N100 in the case of a
private company – section 378 of CAMA.
