Oral Agreement by Directors of a Company to Share Profit With a Person: Effect of Failure of Company

September 2, 2020 Stan

ORAL AGREEMENT BY DIRECTORS OF A COMPANY TO SHARE PROFITS WITH AND MAKE A PERSON A DIRECTOR FOR THE SERVICE RENDERED BY THE PERSON: IMPLICATIONS OF THE COMPANY’S FAILURE TO FULFILL THE SAID AGREEMENT UNDER THE EXTANT LAWS IN NIGERIA

SCENARIO

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 expertise and political contacts to gain business advantage and expansion for the company. A and B orally agreed with C that profits made by the company shall be shared equally with C and that C would be made a director of the company. On the basis of the said agreement, C contributed greatly in securing a contract for the company which made A commend C’s effort vide a letter.

Consequently, C was designated and instructed to act as the Director of Business Development (DBD) of the company and other efforts were begun to ensure that C was made a director of the company as orally agreed by all the parties. But there was never any written resolution passed to make C a director neither was the register of directors of the company amended.

Consequently, the company secured a contract where it made a total profits of N60,000,000 (Sixty Million Naira only). Shockingly, A and B had refused to share the said profits with C.

INTRODUCTION

The scope of this write-up is to: identify the attendant legal issues arising from the scenario; and appraise the identified legal issues in the light of the extant principles of law (statutory and judicial). Also, a brief attempt will be made to advise C on the strength or otherwise of his case.

LEGAL ISSUES

1. Whether C was in law a director of the company.

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

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

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

LEGAL POSITION ON ISSUES

1. Whether C was in law a director of the company:

Generally, the question of: who is a director of a company is more of a question of law than fact. Section 244 of the Companies and Allied 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’. Undoubtedly, the directors’ roles are as fundamental to the wellbeing of a company just as blood is to the survival of the human body. Perhaps, that is why company statutes all over the world make special provisions about the procedures of appointment and removal of a director.

In the light of the foregoing, one can safely say that C was not a director of the company because he was never validly appointed so. Though, C was designated as a Director of Business Development (DBD) of the company but nothing was done to amend the necessary registers of the company at the Corporate Affairs (CAC) registry. In other words, the designation of C as the DBD without filing necessary amendments in the company’s register of directors was a mere expression of intention which was never perfected in law.

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

According to Section 3, of the Partnership Law of Lagos State, partnership is the relationship which subsists between persons carrying on a business in common with a view to profit. From the foregoing statutory definition, one can say a partner is a person who carries on business with such other partners. It is imperative to examine the various statutory rules that determine the nature of partnership. Section 4 of the Partnership Law provides thus:

(a) ”Joint tenancy, tenancy in common, joint property, common property or part ownership does not of itself create a partnership as to anything so held or owned whether the tenants or owners do or do not share any profits made by use thereof.

(b) The sharing of gross returns does not of itself create a partnership whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are 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 receipt of such a share or of a payment contingent on varying with the profits of a business, does not itself make him a partner in the business; and in particular –

(I) the receipt by a person of debt or other liquidated amount by installments or otherwise out of the accruing profits of a business does not of itself make him 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 by a share of the profit of the business does not of itself make the servant or agent a partner in the business or liable as such;… ”

From the foregoing, it is clear that partnership is a question of express agreement between the partners because the law will not ordinarily presume the existence of partnership between persons doing business together. It then suffices to say that: a mere contract made with a servant or person for remuneration or sharing of company’s profits does not ipso facto make such servant or person a partner.

It is noteworthy to state that C’s case 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 share out of the income of the company. But he was not a partner in the strict legal sense.

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

It is imperative to examine first the Labour Law angle of the relationship that existed between the company and C before considering the strict contractual aspect of the relationship. Accordingly, Section 91 of the Labour Act, ‘contract of employment’ means an ”agreement, whether oral or written, express or implied, whereby one person agrees to employ another as a worker and that other person agrees to serve the employer as a worker”.

In the same vein, the Act defines a worker as ”any person who has entered into or works under a contract with an employer, whether the contract is for manual labour or clerical work or is expressed or implied or oral or written, and whether it is a contract of service or a contract personally to execute any work or labour… ”

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

”… a contract of employment connotes a contract of service or apprenticeship, whether express, or implied, and if it is express, whether it is oral or in writing”.

Hence, C was a worker or an employee of the company because he was indeed working for the company. In other words, there were enough instructions and directions given to C which point to the fact that C was working for and on behalf of the company when he worked as the DBD of the company.

From another point of view, the facts at hand can also be addressed from the strict contractual agreement sense. It is trite in law that 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 intention to enter into legal relations… Once the offer is unconditionally accepted, a valid contract has come into existence”.

Also, in the case of Dragetanos Const. (Nig.) Ltd. v. F.M.V. Ltd & Ors., the Court of Appeal held as follows:

”… it is appropriate and necessary to restate the time-honoured principle and ingrained in the Law of Contract that, ‘pacta conventa quae neque contra leges neque dolo malo inita sunt, omni modo obsevanda servanda sunt’, in order words, contractual agreements which have neither been fraudulently nor illegally entered into by parties, must in all respects be observed or enforced”.

Also, in the case of Nicon Hotels Ltd. v. Nene Dental Clinic Ltd, the Court of Appeal held as follows:

”An agreement voluntarily entered into must be honoured in good faith. Equity looks at the intent and not forms and will always impute an intention to fulfill an obligation”

In the light of the foregoing, it is safe to assert that a contract can be established between the company and C as evident in the various instructions given to C by A, the Managing Director of the company. Of course, the actions of the parties show clearly that there were offer, acceptance, consideration and intention to create a legal relation among all the parties. Hence, the decision of the company and the subsequently joint efforts made by all the parties in securing a contract constitute a subsisting and enforceable contract among the parties.

4. Whether C was entitled to share in the income made by the company:

This issue deals primarily with the determination of remuneration of C. Though, the friendly oral understanding between the parties about profit sharing was not contained in any written ‘Profit Sharing Agreement’, profits shall be shared equally because parties had orally agreed it to be so shared. However, it is to be noted that there may arise an evidential issue 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) among 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 sweat equity (he contributed actively in the contract from where the company made N60m). It was indeed wrong for A and B to solely convert all the income made by the company.

ADVICE FOR C

In the light of the foregoing, C can either sue for breach of contract of employment, or breach of contract simpliciter which can be deduced from the circumstances of both the actions and relationship of the parties. As answered by the statutory provisions above, the question of what constitutes a contract of employment is a question of law. Of course, the exact remuneration of C is equal proportion with A and C of the total profits made by the company from the contract carried out by A, B and C.

Conclusion

It is imperative to state that C’s case is standing on a very weak footing in partnership law, but he may have a remedy for breach of contract of employment because there was indeed an employment. More specifically as noted above, C can sue for breach of contract simpliciter because there was indeed a subsisting contact among the parties.