One of the most overlooked corporate governance risks is the assumption that every individual acting as a director has been legally appointed to that position. In practice, many companies permit individuals to participate in board activities, represent the company in negotiations, or hold themselves out as directors without ensuring that all legal appointment requirements have been satisfied.
Under the Companies and Allied Matters Act (CAMA), a director is a person duly appointed by the company to direct and manage its business and affairs.
The law also creates a rebuttable presumption in favour of third parties dealing with a company. Any person dealing with the company is entitled to assume that individuals described by the company as directors have been properly appointed. This promotes commercial certainty and protects investors, lenders, suppliers, regulators, and other stakeholders.
However, this protection for third parties does not excuse non-compliance by the company itself.
The Compliance Risk
Where a person who has not been duly appointed acts or holds himself out as a director, such conduct constitutes an offence under the law.
The consequences may include:
– Criminal liability;
– Financial penalties;
– Imprisonment upon conviction;
– Court orders restraining the individual from acting as a director; and
– Reputational damage to both the individual and the company.
The company itself may also face sanctions where it knowingly holds out an improperly appointed person as a director. In such circumstances, regulatory penalties may be imposed, and shareholders may seek court orders restraining both the company and the individual from continuing such conduct until the appointment is regularised.
Why This Matters to Businesses
Defects in director appointments can create significant legal and commercial risks, including:
– Challenges to corporate decisions;
– Questions regarding the validity of board resolutions;
– Increased regulatory scrutiny;
– Due diligence concerns during investments, acquisitions, and financing transactions;
– Shareholder disputes; and
– Potential exposure to litigation.
For growing businesses, governance failures that appear minor today can become major obstacles during fundraising, mergers and acquisitions, regulatory reviews, or investor due diligence exercises.
Practical Steps Companies Should Take
Companies should periodically review their governance framework to ensure that:
1. All directors have been properly appointed in accordance with CAMA and the company’s constitutional documents.
2. Board and shareholder resolutions relating to appointments are properly documented and retained.
3. Statutory filings concerning directors are accurate and up to date.
4. Individuals representing themselves as directors possess the necessary legal authority.
5. Corporate records are maintained in a manner capable of withstanding regulatory review and transaction due diligence.
Key Takeaway
A person may perform the functions of a director, attend board meetings, negotiate transactions, and represent the company publicly. However, if that person has not been duly appointed, both the individual and the company may face significant legal and regulatory consequences.
Sound corporate governance requires more than identifying who manages the company. It requires ensuring that every person acting as a director is legally entitled to do so.
Businesses, investors, and corporate stakeholders should therefore treat director verification as an essential component of corporate compliance, governance audits, and transaction due diligence.
Effective corporate governance begins with ensuring that those who lead the company have the legal authority to do so.