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Who can authorize a Company to Institute Legal Proceedings under Nigeria Law?
Section 299 of the Companies and Allied Matters Act (“the CAMA”) provides that;
“Subject to the provisions of this Act, where an irregularity has been committed in the course of a company's affairs or any wrong has been done to the company, only the company can sue to remedy that wrong and only the company can ratify the irregular conduct”
The above provision is in line with the common law rule in the English case of Foss v. Harbottle (1843) 67 ER 189. The court dismissed 2 shareholders’ claim of misapplication of the company’s properties brought against 5 Directors and held that when a wrong is committed against a company, it is only the company that has the standing to sue.
In effect the court established two rules. Firstly, the “proper plaintiff rule” which is that a wrong done to the company may be vindicated by the company alone. Secondly, the “majority rule principle” which states that if the alleged wrong can be confirmed or ratified by a majority of members in a general meeting, then the court will not interfere. The rationale for this is that;
(a) Majority rule is a corollary to the corporate legal personality principle;
(b) The rule prevents multiplicity of actions over one or similar incidents arising from the same set of facts;
(c) The members in a general meeting have powers to ratify the acts of the alter ego of the company.
However, since the strict application of the rule in Foss v Harbottle would led to injustice against minority shareholders, the CAMA and Nigerian courts acknowledges the right of action of shareholders either individually or collectively, against the directors and even the company itself. This is the basis of Section 300 and 301 of the CAMA which provides that;
“300. Without prejudice to the rights of members under sections 303 to 305 and sections 310 to 312 of this Act or any other provisions of this Act, the court on the application of any member, may by injunction or declaration restrain the company from the following -
(a)entering into any transaction which is illegal or ultra vires;
(b)purporting to do by ordinary resolution any act which by its constitution or the Act requires to be done by special resolution;
(c)any act or omission affecting the applicant's individual rights as a member;
(d)committing fraud on either the company or the minority shareholders where the directors fail to take appropriate action to redress the wrong done;
(e) where a company meeting cannot be called in time to be of practical use in redressing a wrong done to the company or to minority shareholders; and
(f)where the directors are likely benefit, or have profited or negligence or from their breach of duty.
301. (1) Where a member institutes a personal action to enforce a right due to him personally, he shall not be entitled to any damages but to a declaration or injunction to restrain the company or the directors from doing a particular act.
(2) Where a member institutes a representative action on behalf of himself and other affected members to enforce any rights due to them, he shall not be entitled to any damages but to a declaration or injunction to restrain the company and/or directors from doing a particular act”
In the same vein, a member may apply for leave of court to commence an action in the name of the company. This is provided in Section 303 of the CAMA thus;
“(1) Subject to the provisions of subsection (2) of this section, an applicant may apply to the court for leave to bring an action in the name or on behalf of a 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.
(2) No action may be brought and no intervention may be made under subsection (1) of this section, unless the court is satisfied that -
(a) the wrongdoers are the directors who are in control, and will not take necessary action;
(b) the applicant has given reasonable notice to the directors of the company of his intention to apply to the court under subsection (1) of this section if the directors of the company do not bring, diligently prosecute or defend or discontinue the action;
(c) the applicant is acting in good faith; and
(d) it appears to be in the best interest of the company that the action be brought, prosecuted, defended or discontinued.”
From the foregoing,
(a) Where there is a wrong against a company, it is the company alone through the Board of Directors that can sue to remedy the wrong against the company. The Board of Directors would pass a Board Resolution to commence an action to remedy the wrong against the company.
(b) Where the Directors fails to sue to remedy the wrong against the company, a member of the company may seek leave of court to commence the action in the name of the company to remedy the wrong against the company. The member in seeking leave of court must satisfy the court that the Directors are the wrongdoers who are in control of the company and he gave notice to them to commence the action to remedy the wrong and they refused to do so. The member must also satisfy the court that his action is brought in good faith; he will prosecute the action diligently and the action is in the best interest of the company.
(c) A member who is a minority shareholder may commence an action against the company or the Directors if his personal rights in the company are infringed upon. The member will be entitled to only injunction and declaration if he sues to protect his personal rights. He is not entitled to damages.