Disqualification of Directors Culpable of Criminal Offences – Whether Convicted or Not!

Disqualification of Directors Culpable of Criminal offences – Whether Convicted or Not!

The Companies Act, 2019 (Act 992), amongst others, seeks to create a robust regime for regulating the appointment and conduct of directors. It can be said, for instance, that Act 992 strives to ensure that only persons of high moral standing and experience end up being appointed as directors.

Though there are extensive provisions in Act 922 regarding the disqualification and restraint of persons acting as directors under certain circumstances, this article is focused on Section 177(1)(c) of Act 992.

Section 177(1)(c) provides that:

Where,

[…]

(c) a person has been culpable of a criminal offence, whether convicted or not, in relation to a body corporate or of fraud or breach of duty in relation to a body corporate;

the court on its own motion or on the application of a person referred to in subsection (6) may order that that person shall not without leave of the court, be a director or in any way, whether directly or indirectly be concerned or take part in the management of a company or act as an auditor, receiver or liquidator of a company for a period specified in the order.

Thus, for Section 177(1)(c) of Act 992 to be properly triggered, a number of condition must be met. First, the person must have been culpable of a criminal offence (regardless of whether the person was convicted or not); and secondly the offence must relate to body corporate or fraud or breach of duty in relation to a body corporate.

It is worth pointing that Section 177(1)(c) of Act 992 shares striking similarities with Section 186(1)(c) of the repealed Act 179 which provides as follows that:

Where,

[…]

(c) it appears that a person has been guilty of a criminal offence, whether convicted or not, in relation to a body corporate or of a fraud or breach of duty in relation to a body corporate

the court on its own motion or on the application of a person referred to in subsection (3) may order that that person shall not without leave of the court, be a director or in any way, whether directly or indirectly be concerned or take part in the management of a company or act as an auditor, receiver or liquidator of a company for a period specified in the order.

The difference in the two provisions are these: Section 177(1)(c) of Act 992 requires that a person be “culpable” of a criminal offence. Section 186(1)(c) of Act 179 provided that a person may be disqualified from acting as a director if the person “appears to be guilty”. This change immediately raises the question of the significance of the change in word from “appears” under Act 179 to “culpable” under Act 992. The Oxford English Dictionary defines appear as “seem” or “give the impression of being.” The same dictionary defines “culpable” as “deserving blame.” The standard for attributing a conduct to a director has therefore been elevated from the mere cavalier standard of “appears” to much more definite and slightly higher standard of “culpable”. Thus whereas under the previous regime, it was enough for a person to simply argue that a director “appeared” to have acted in a particular way, the current legislation requires that the person seeking to have a director disqualified must prove that the director in question was to blame for the conduct complained of. 

Case law Review

There is no currently no case law discussing Section 177(1)(c) of Act 992. But we can learn a thing or two from the very decisions that discussed Section 186(1)(c) of Act 179. Thankfully, the Court of Appeal gave us a lot to chew on in the case of In Re West Coast Dyeing Industry Ltd; Adams & Anor v Tandoh. The Court of Appeal explained that the object of Section 186(1)(c) [which we can argue is the same as Section 177(1)(c)]:

“appears to be to safeguard the interest of members of the public who are shareholders of companies or who have either invested in or given credit to companies; and to ensure that the said investments and assets of companies are managed only by honest persons as directors and not by frauds or by persons with criminal propensity.”

The Court of Appeal per Abban JA went on to say that since the aim of a law is intended to safeguard the public,  a wide interpretation was needed to give effect to the intention of the statute. 

In the Re West Coast Dyeing case, the Appellant initially set out to challenge his removal as a director but was dealt a deadly blow when the trial judge, on his own motion, went on to find that the Plaintiff had been involved in criminal activities and therefore relied on Section 186(1)(c) of Act 179 to disqualify the Appellant from acting as a director.

It is natural to expect the Plaintiff to not take this lying down. On an appeal to the Court of Appeal, counsel for the Plaintiff raised a number of interesting issues of law. The Plaintiff argued that the judge erred in law in disqualifying him from acting as a director without the leave of the court in the absence of conclusive proof of wrong doing. The Appellant also argued that the court had not undertaken any investigation in order to arrive at an independent finding of guilt. Plaintiff’s counsel also raised the issue of the appropriate standard of proof required in a matter of this nature. Learned Counsel for the Plaintiff submitted that the appropriate standard of proof was proof beyond reasonable doubt which the court did not seem to have satisfied. Counsel faulted the court for its failure to cross-examine the Plaintiff on the allegations made against him.

The court dismissed the allegations made against the trial court’s finding. The court found as a matter of fact that the Plaintiff had notice of the allegations made against him and yet failed to show up in court to be cross-examined regarding those matters. In the words of the Court of Appeal, “…the learned trial judge went as far as asking the appellant to adduce oral evidence in addition to his affidavit evidence. But the appellant flatly refused to do so; and it would have been an abuse of judicial power if the trial court, despite the appellant’s refusal, had ordered the appellant into the witness box to be examined and cross-examined.”

Regarding the question of the conclusiveness or otherwise of the criminal allegations – the court stated that from the very language of section 186(1)(c), there was no requirement that the person involved must have been convicted. In the words of the Abban JA:

“the section itself makes it clear that the person concerned need not be a convicted person. All that is required is that it must appear to the court that the conduct of the said person or the matters complained of amounted to a criminal offence; and like the breach of duty or the fraud, the offence must have been committed in relation to a body corporate. At any rate, the very high standard of conclusive proof advocated for by the learned counsel for the appellant was achieved in the present case. For there was overwhelming evidence before the court on which the learned trial judge could hold that the Plaintiff was guilty of a criminal offence.”

In making these statements, Abban JA went on to list the litany of offences committed by the Appellant. These include (a) unauthorised use of company stamp; (b) fraudulent endorsement of cheques; (c) embezzlement of funds; and (d) misappropriation of company funds. The court further noted that these offences could have easily been prosecuted for the offence of stealing.

Evaluation of Section 177(1)(c)

A comparison of the two provision shows that they are substantially similar in terms of their wording. But with one major exception. Whereas under Section 186(1)(c) of Act 179, a person may be disqualified as a director where it “appears that the person has been guilty of a criminal offence.

This requirement, as pointed out earlier, has been slightly varied under Section 177(1) (c) of Act 992. This distinction is significant because under Act 179, all that the court had to satisfy itself with was the “appearance” of a criminal offence. However, under the new rendition, a much more rigorous hurdle has to be crossed – that is the the applicant has to establish that a person is culpable of a criminal offence in respect of a body corporate or in respect of fraud or breach of duty involving a body corporate.

Since Section 177(1)(c) requires that a person must have been culpable of a criminal offence, this immediately raises the question as to how the culpability of a person can be established. Does that call for a separate judicial proceeding? Or can the finding of criminal culpability be “tagged along” in some other proceeding (as it happened in the Re West Coast dyeing case). The answer clearly is that the criminal culpability of the person to be appointed director may be decided by the court based on the documents and the papers filed by the parties.