ORAL AGREEMENT BY DIRECTORS OF A COMPANY TO SHARE PROFITS AND APPOINT A PERSON AS DIRECTOR FOR SERVICE RENDERED BY THE PERSON: IMPLICATIONS OF THE COMPANY’S BREACH OF SUCH AGREEMENT UNDER THE LAWS IN FORCE IN NIGERIA
SCRIPT
A (managing director) and B were the only registered directors and shareholders of a Nigerian company. The company decided to increase its business prospects, especially in the public sector, by involving C, who was expected to use both his experience and his political contacts to gain business advantage and expansion for the company. A and B orally agreed with C that the profits made by the company will be shared equally with C and that C will be appointed director of the company. On the basis of said agreement, C was instrumental in securing a contract for the company which caused A to praise C’s effort in a letter.
Accordingly, C was appointed and instructed to act as Director of Business Development (DBD) for the company and further steps were taken to ensure that C was appointed as a director of the company as agreed orally by all parties. But no written resolution to make C a director was ever passed nor was the company’s register of directors amended.
Consequently, the company got a contract where it made a total profit of N60,000,000 (only sixty million naira). Surprisingly, A and B refused to share those benefits with C.
INTRODUCTION
The scope of this article is to: identify the related legal issues that arise from the scenario; and assess the legal issues identified in light of existing legal principles (statutory and judicial). In addition, a brief attempt will be made to advise C on the strength or otherwise of her case.
LEGAL ISSUES
1. If C was in right a director of the company.
2. If it can be said that C is a partner of A and B.
3. If C was an employee or worker of the company.
4. Whether C is entitled to share in the income earned by the company
LEGAL POSITION ON ISSUES
1. If C was by right a director of the company:
In general, the question of who is a director of a company is more a matter of law than fact. Section 244 of the Companies and Related Matters Act (CAMA) describes ‘a director of a company registered under this Act is a person duly appointed by the company to direct and manage the business of the company’. Without a doubt, the role of directors is as fundamental to the well-being of a company as blood is to the survival of the human body. Perhaps for this reason, the statutes of companies around the world provide for special provisions on the procedures for the appointment and removal of a director.
In light of the above, it can be safely stated that C was not a director of the company because he was never validly appointed as such. Although, C was appointed as the Director of Business Development (DBD) of the company, but nothing was done to amend the necessary records of the company in the Corporate Affairs register (CAC). In other words, the designation of C as DBD without presenting the necessary modifications in the register of directors of the company was a mere expression of will that was never perfected in law.
2. If C can be said to be a partner of A and B:
According to Section 3 of the Lagos State Corporations Act, partnership is the relationship subsisting between persons conducting business in common with a view to making profit. From the legal definition above, it can be said that a partner is a person who conducts business with other partners. It is imperative to examine the various statutory rules that determine the nature of the company. Article 4 of the Companies Law establishes as follows:
(a) “Joint tenancy, tenancy in common, joint ownership, common ownership, or partial ownership does not of itself create a partnership as to anything owned or owned, whether tenants or owners share or not the profits obtained by the use of the same.
(b) The distribution of gross income does not of itself create a partnership, whether or not the persons sharing such income have a joint or common right or interest in any property from which or from the use of which the income is derived .
(c) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but the receipt of such a share or of a payment contingent on varying with the profits of a business, does not itself become a partner in the business; and in particular –
(I) a person’s receipt of a debt or other amount settled by installments or otherwise from the retained earnings of a business does not itself make him or her a partner in the business or liable as such;
(ii) a contract for the remuneration of a servant or agent of a person engaged in a business for a part of the profit of the business does not of itself make the servant or agent a partner in business or liable as such;… .”
From the foregoing it follows that the partnership is a matter of express agreement between the partners because the law ordinarily will not presume the existence of a partnership between people who do business together. Suffice then to say that: the mere contract entered into with a servant or person in exchange for remuneration or participation in the profits of the company does not ipso facto convert such servant or person into a partner.
It should be noted that the case of C falls within the contemplation of Section 4 (c) (ii). The legal implication of this is that C was a servant of the company who was entitled to a share of the company’s income. But he was not a partner in the strict legal sense.
3. If C was an employee or worker of the company:
It is imperative to first examine the Labor angle of the relationship that existed between the company and C before considering the strictly contractual aspect of the relationship. Accordingly, Section 91 of the Labor Law, ’employment contract’ means an ‘agreement, whether oral or written, express or implied, by which one person agrees to employ another as a worker and that other person agrees to serve the employer as worker.
In the same sense, the Law defines a worker as “any person who has entered into or works under a contract with an employer, whether the contract is for manual or office work, whether express or implied, oral or written, and either it is a contract of service or a contract personally to execute any work or work…”
In the case of Iyere v. Bendel Feed & Flour Mill Ltd., the Nigerian Supreme Court described an employment contract as follows:
”…a contract of employment connotes a contract of service or apprenticeship, whether express or implied, and if express, whether oral or written”.
Therefore, C was a worker or employee of the company because he actually worked for the company. In other words, sufficient directions and directions were given to C that point to the fact that C was working for and on behalf of the company when he was working as the company’s DBD.
From another point of view, the facts that concern us can also be approached from the sense of a strict contractual agreement. It is hackneyed in the law that the parties are bound by the terms of their agreement. In the case of Akanmu v. Olugbode, the Court held as follows:
“The elements of a valid contract are offer, acceptance, consideration and intent to enter into legal relations…Once the offer is unconditionally accepted, a valid contract exists.”
Likewise, in the case of Dragetanos Const. (Nig.) Ltd. v. FMV Ltd & Ors., the Court of Appeal held as follows:
”… it is opportune and necessary to reaffirm the principle consecrated and rooted in the Law of Contracts that, ‘pacta conventa quae neque contra leges neque dolo malo inita sunt, omni modo obsevanda servanda sunt’, in other words, the agreements contracts that have not been entered into fraudulently or illegally by the parties must be observed or enforced in all respects.
Similarly, in the case of Nicon Hotels Ltd. v. Nene Dental Clinic Ltd, the Court of Appeal held as follows:
”An agreement entered into voluntarily must be performed in good faith. Equity looks at the intention and not the forms and will always impute an intention to fulfill an obligation.
In light of the above, it is safe to say that a contract can be established between the company and C as evidenced by the various instructions given to C by A, the CEO of the company. Of course, the actions of the parties clearly show that there was an offer, acceptance, consideration and intent to create a legal relationship between all parties. Therefore, the Company’s decision and subsequent joint efforts by all parties to secure a contract constitute a subsisting and enforceable contract between the parties.
4. If C was entitled to share in the income earned by the company:
This issue deals primarily with the determination of C’s remuneration. Although the parties’ amicable oral understanding of benefit sharing was not contained in any written “Profit Sharing Agreement”, the benefits will be shared equally because the parties they had agreed orally. shared. However, it should be noted that an evidentiary issue may arise if A and B deny their oral agreement. It is also imperative to add that: assuming without conceding that there was no agreement (oral or written) between A, B and C, the capital will still allow C to participate in profits based on C’s capital stock.
So it’s safe to say that C is entitled to his own share of the company’s revenues due to his sweat equity (he actively contributed to the contract from which the company earned N60m). In fact, it was incorrect for A and B to convert only all the income earned by the company.
TIP FOR C
In light of the foregoing, C can sue for breach of employment contract, or breach of contract simpliciter that can be deduced from the circumstances of both the actions and the relationship of the parties. As answered in the legal provisions above, the question of what constitutes an employment contract is a matter of law. Of course, the exact remuneration of C is the same proportion as A and C of the total profits obtained by the company from the contract made by A, B and C.
conclusion
It is imperative to state that C’s case has a very weak foundation in company law, but may have a remedy for breach of employment contract because there was in fact employment. More specifically, as noted above, C can sue for breach of contract simpliciter because there was, in fact, subsistent contact between the parties.