Oral agreement by directors of a company to share profits with one person: effect of company failure

ORAL AGREEMENT BY THE DIRECTORS OF A COMPANY TO SHARE PROFITS WITH AN INDIVIDUAL AND TO MAKE AN INDIVIDUAL THE DIRECTOR OF THE SERVICES PERFORMED BY THE INDIVIDUAL: EFFECTS OF THE COMPANY’S FAILURE TO PERFORM THE AGREEMENT UNDER THE LAWS EXISTING IN NIGERIA

SCENARIO

A (Managing Director) and B were the only registered directors and shareholders of a Nigerian company. The company decided to improve its business prospects, particularly in the public sector, by bringing in C, who was expected to use both his expertise and political contacts to achieve business advantage and expansion for the company. A and B verbally agreed with C that the profits made by the company would be shared equally with C and that C would be appointed director of the company. Based on the said agreement, C was instrumental in securing a contract for the company, prompting A to write a letter praising C’s efforts.

Consequently, C was appointed and directed to act as the Company’s Director of Business Development (DBD) and further efforts were made to ensure that C was appointed as a Director of the Company as verbally agreed by all parties. But no written resolution was ever passed to make C a director, nor was the list of directors of the Company changed.

Consequently, the company secured a contract in which it made a total profit of N60,000,000 (only sixty million naira). Shockingly, A and B had refused to share said profits with C.

INTRODUCTION

The scope of this description is to identify the accompanying legal issues that arise from the scenario; and to assess the legal issues identified in the light of existing legal principles (statutory and judicial). A brief attempt is also made to advise C on the strength or the opposite of his case.

LEGAL MATTERS

1. Whether C was legally a director of the company.

2. Whether C can be said to be a partner of A and B.

3. Whether C was an employee or worker in the company.

4. Whether C is entitled to share in the income of the company

RIGHT POSITION TO ASK

1. Whether C was legally a director of the company:

In general, the question of who is the director of a company is a question of law rather than fact. Section 244 of the Companies and Allied Matters Act (CAMA) states: “A director of a company registered under this Act is a person duly appointed by the company to direct and administer the affairs of the company”. Undoubtedly, the roles of directors are as fundamental to the well-being of a company as blood is to the survival of the human body. Perhaps that is why company bylaws around the world provide special provisions regarding the procedures for appointing and removing a director.

In view of the foregoing, it is safe to say that C was not a director of the company as he was never validly appointed as such. Although C was named as the company’s Director of Business Development (DBD), nothing was done to amend the company’s required registers in the Corporate Affairs Registry (CAC). In other words, the designation of C as DBD without filing necessary changes in the company’s register of companies was a mere declaration of intent that was never legally perfected.

2. Whether C is partner of A and B:

According to Section 3 of the Lagos State Partnerships Act, a partnership is the relationship existing between persons who carry on a business together with the intention of making a profit. From the legal definition above, it can be said that a shareholder is a person who deals with such other shareholders. It is imperative to examine the various legal regulations that determine the nature of the partnership. Section 4 of the Partnership Act thus provides:

(a) “Joint tenancy, joint tenancy, joint ownership, common ownership or fractional ownership does not in itself create a partnership in respect of something so held or owned, whether the tenants or owners share the profits derived from the use or Not .

(b) The sharing of gross proceeds does not in itself create a partnership, whether or not the persons sharing such proceeds have a common or common right or interest in any property from which or the use of which the proceeds derive.

(c) The receipt by a person of a share of a company’s profits is prima facie evidence that he is a shareholder of the company, but receipt of such share or payment depends on whether it varies with a company’s profits, makes not make him a partner in the company; and especially –

(I) the receipt by any person of any debt or other liquidated amount, in installments or otherwise, out of the accruing profits of a company, does not in itself make him or her a participant in the company or liable as such;

(ii) a contract for the remuneration of a servant or agent of a person employed by a company by a share in the profits of the company shall not in itself make the servant or agent a part-owner of the company or liable as such; … .”

From the foregoing it is clear that the partnership is a matter of express agreement between the partners as the law does not normally require the existence of a partnership between persons doing business with each other. Suffice it to say, then, that a mere contract with an employee or person for remuneration or a share in the profits of the company does not automatically make that employee or person a partner.

It is noteworthy that C’s case falls under the consideration of Section 4(c)(ii). The legal consequence of this is that C was an employee of the company entitled to a share of the company’s income. But he was not a shareholder in the strict legal sense.

3. Whether C was an employee or worker in the company:

It is imperative to first examine the labor law aspect of the relationship that existed between the company and C before looking at the strictly contractual aspect of the relationship. Accordingly, Section 91 of the Labor Code, “contract of employment” means an “oral or written agreement, express or implied, by which one person agrees to hire another as an employee and that other person agrees to serve the employer as an employee ”.

Similarly, the law defines an employee as “any person who has entered into a contract with, or works under a contract with, an employer, whether the contract is for manual or clerical work, or is express or implied, oral or written and whether it is a contract of service or a contract for the personal performance of work or work…”

In the case of Iyere v. Bendel Feed & Flour Mill Ltd. the Nigerian Supreme Court described an employment contract as follows:

“… an employment contract is a contract of service or training, express or implied, and if express, oral or written.”

Therefore, C was a worker or employee of the company because he actually worked for the company. In other words, C was given enough direction and direction to indicate that C was working for and on behalf of the Company while serving as the Company’s DBD.

From another point of view, the present situation can also be addressed in terms of a strictly contractual agreement. It is banal in law that the parties are bound by the terms of their agreement. In the case of Akanmu v. Olugbode, the court ruled as follows:

”Components of an effective contract are offer, acceptance, consideration and intention to enter into a legal relationship… A valid contract has come about with the unconditional acceptance of the offer”.

Also in the case of Dragetanos Const. (Nig.) Ltd. v FMV Ltd & Ors. the Court of Appeal ruled as follows:

“…it is appropriate and necessary to reiterate the long-established principle enshrined in contract law, that ‘pacta conventa quae neque contra leges neque dolo malo inita sunt, omni modo obsevanda servanda sunt’, in other words, contractual agreements made by entered into by the parties neither fraudulently nor unlawfully must be complied with or enforced in all respects.

Also in the case of Nicon Hotels Ltd. against Nene Dental Clinic Ltd the Court of Appeal ruled as follows:

“An agreement entered into voluntarily must be honored in good faith. Equity looks at intent, not form, and always presupposes an intent to fulfill an obligation.”

In view of the above, it is safe to say that a contract can be concluded between the company and C, as evidenced by the various instructions given to C by A, the company’s director. Of course, the actions of the parties clearly show that there was an offer, acceptance, consideration and intention to establish a legal relationship between all parties. Therefore, the Company’s decision and subsequent joint effort by all parties to enter into a contract constitutes an existing and enforceable contract between the parties.

4. Whether C was entitled to participate in the income of the company:

This question deals primarily with the determination of C’s remuneration. Although the amicable verbal agreement between the parties regarding profit sharing was not reflected in any written “Profit Sharing Agreement”, the profits are shared equally because the parties had verbally agreed that they would be shared . However, it should be noted that problems of proof may arise if A and B refuse their verbal agreement. It is also important to add that assuming that there has been no agreement (oral or written) between A, B and C, equity will still allow C to share in the profits based on C’s sweat equity.

Therefore, it is safe to say that C is entitled to his own share of the company’s income because of his welding capital (he actively contributed to the contract from which the company earned N60 million). Indeed, it was wrong that A and B only converted all of the company’s earnings.

ADVICE FOR C

In view of the foregoing, C may sue for either breach of contract of employment or simple breach of contract, which can be inferred from the circumstances of both the parties’ actions and relationship. As answered by the legal provisions above, what constitutes an employment contract is a legal question. Of course, C’s exact compensation is equal to A’s and C’s equal share of the total profits that the firm derives from the contract performed by A, B, and C.

Conclusion

It is important to note that C’s case is on a very weak basis in partnership law, but he may have a remedy for breach of contract of employment as there was indeed an employment relationship. More specifically, as mentioned above, C can sue for breach of contract more easily because there was in fact an existing contact between the parties.