Reciever/Manager and the interest of Shareholders

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The Black’s Law Dictionary[1] defines a Receiver as “a person appointed by court for the purpose of preserving the property of a debtor pending the action against him or applying the property in satisfaction of a creditor’s claim, whenever there is a danger that, in absence of such appointment, the property will be lost, removed or injured”.

The Companies and Allied Matters Act[2] (hereinafter simply called CAMA), on the other hand, does not offer a good deal of help in interpreting the term “Receiver” but only states in section 650 that a “Receiver includes Manager”. Even though the CAMA did not sufficiently define who a Receiver/Manager is, it is clear from its provision that a Receiver/Manager may be appointed by the court[3] or out of court[4] for the purpose of protecting the assets of the company or to further its business and promote the purposes for which it is formed. Consequently, the Receiver/Manager, upon appointment, may choose to carry on the business of a company with the objective of a rescue in the long term or of a beneficial sale as a going concern in the short term (that is, close the business and sell up)[5]

Although the CAMA vests broad powers in the Receiver/Manager whilst performing his duty, this paper will attempt a discourse, with the aid of legal authorities, centered on examining the implication, extent and limit of such powers (if any) vis-a-vis the interest of shareholders in the ownership of the company and the authority of directors as the metaphorical brain of the company.

LEGAL IMPLICATIONS OF APPOINTING A RECIEVER/MANAGER; THE ROLE OF DIRECTORS AND SHAREHOLDERS OF A COMPANY

The power vested in the Receiver/Manager by law[6] is so wide to be covered under the purview of a short piece as the current one. However, through the aid of decided cases, the writer will attempt to elucidate on the legal implications of the appointment of a Receiver/Manager in relation to the properties of the company and functions of the Directors.

The powers of a Receiver/Manager and the implication thereof on the management of the company’s assets, was extensively dealt with by Karibi-Whyte JSC in the sister cases ofIntercontractors Nigeria Ltd v. N.P.F.M.B[7] and Intercontractors Nigeria Ltd. v. U.A.C.[8] where he opined that…

by the appointment of a Receiver/Manager under his powers in the debenture deed, the assets formerly available to the company ceases to be so, and now becomes fixed and is crystallized and remains under the general control of the receiver manager…the company ceases to have any right to deal with the assets. Its right thereto is suspended….

Intercontractors Nigeria Ltd. v. U.A.C. his Lordship pronounced the law as:

…the effect of the appointment of a receiver/manager is to paralyse the powers of the owner of goods from dealing with it. A company does not lose its legal personality neither are the goods vested in the Receiver/Manager on the appointment…..he is however entitled to possession of the goods, subject to all specific charges validly created in priority to the floating charge….this enables him to institute and defend actions in the name of the debenture holder or the company entitled to the goods under the debenture…

The Court in Unibiz (Nig) Ltd. v. CBCL Nig. Ltd[9]. while expounding on the  powers of Directors over Company properties, applied the principle of law in Intercontractors v. N.D.F.B.M. (supra) and held that,

With the appointment of a Receiver, the powers of Directors over the properties comprised in the security of the company automatically become paralysed; the floating charge also becomes crystalised with the appointment of a receiver by a debenture holder. It is not in dispute, indeed the factual setting of this case shows that the respondent, who is the creditor, appointed Babington Ashaye as the Reciever/Manager. The law is that where a creditor enforces his security by appointing a Receiver/Manager, the assets belonging to the debtor/company now come under the general control of Receiver/Manager see Intercontractors Nig Ltd. v. National Providern fund Management Board (1988) 2 NWLR (Pt. 76) 280.

The salient question from the foregoing, however, borders on whether the appointment of the Receiver/manager precludes the board of directors from performing their function in relation to the operation of a company? The Court of Appeal inUnibiz (Nig) Ltd. v. CBCL Nig. Ltd. supra gives further insight on the function of Directors during the appointment of a Receiver/Manager thus,

I wish to observe that the position of the law relating to a receiver is that on the appointment of a Receiver the powers of the management of the company’s business automatically become vested in the receiver. But where some matters pertaining to the company do not quite relate to the management of the affairs of the company, its directors can still act. While receivership and management often exclusively dominate the company’s affairs and dealings with the outside world, it does not affect the internal domestic structure of the company. It can therefore be said that although the management of the company is wrestled from the directors with the appointment of a Receiver/Manager the directors are never absolutely functus officio…

It is clear from the above that the court is inclined to adopt the “management rule” in deciding what role falls within the director’s power during receivership. The “management rule” is to the effect that matters relating to the management of the affairs of the company shall be controlled by the Receiver/Manager but other matters not bordering on management of the company may be handled by the Directors without the threat of usurping the power of the Receiver/Manager.

RECEIVER/MANAGER AND THE INTEREST OF SHAREHOLDERS OF A COMPANY

One important aspect where the law does not offer much guidance on the duties of the Receiver/Manager is the area of the protection of Shareholder’s interest particularly as it relates to calling of Annual General Meeting (AGM). Ordinarily, the notice of AGM is given by the Company Secretary on the instruction of the Board of Directors. Thus, it is germane to ask, “Can the ‘management rule’, as enunciated above, serve as a panacea for determining who has the power to call the AGM during receivership?” The answer to this question, in the opinion of the writer and in the light of Unibiz Nig Ltd case, is in the affirmative. The holding of the AGM falls under the management and control of the company’s business. The fiduciary duty of the Receiver/Manager hinges on protecting the interest of his principal (the company) through efficient management and the AGM is at the center of the management strategy of the company. It is therefore safe to conclude that the Receiver/Manager has the exclusive right to control and regulate the holding of an AGM during receivership.

CONCLUSION

From the above cited cases and statutory provisions on the powers and duties of the Receiver/Manager, it is evident that the Receiver/Manager is expected to, at all material times, perform his fiduciary duty to the Company with the utmost interest of members in mind. The Receiver/Manager, as agent of the company, is expected to take necessary steps to protect the interest of the principal.

Although, there is a dearth of judicial authorities that deals with the issue of who may call for an AGM during the performance of the Statutory duties of a Receiver/Manager, in the opinion of the writer of this paper, the AGM, by reason of “the management rule” inUnibiz (Nig) Ltd. v. CBCL Nig. Ltd, may be called at the instance of the Receiver/Manager as the exclusive manager during receivership. What is more, the provisions of CAMA cloak the Receiver/Manager with very wide powers that covers the calling of AGM in the performance of his duty. These provisions broadly empower the Receiver/Manager to manage the company in good faith[10] and/or seek direction from court in relation to any particular matter arising in connection with the performance of his duty[11].

Image Credit:  Flickr/SalFalkoko

[1] 6th Edition.

[2] Cap C20, Laws of the Federation of Nigeria, 2004.

[3] Sec 388 CAMA

[4] Sec 390 CAMA

[5] Gavin Lightman and Gabriel Moss, the Law of Receivers of Companies. (Sweet and Maxwell, London) p.11

[6] See Sec 393(1)(2)(3) CAMA

[7] (1998) 3 NWLR (pt. 76) p. 280.

[8] (1998) 2 NWLR (pt. 26) p. 303.

[9] (2001) 7 NWLR (Part 713) 534.

[10] Section 390 (2)(a) and (b), and Section 392(1)(2)

[11] Section 391 CAMA

 

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