By Timileyin Ilesanmi
A company is legally separate from its directors and shareholders. In ordinary circumstances, a director is not personally liable simply because the company owes money, loses a lawsuit, or becomes insolvent. But that protection is not absolute.
Nigerian law may impose personal liability on a director where the company is used as a shield for fraud, where the director breaches statutory or fiduciary duties, or where the company continues trading while insolvent in circumstances involving fraud or recklessness. The question is therefore not whether a director can ever be liable, but when the law will look beyond the company to the individual behind it.
So when will a director be held personally liable for a company’s debts or wrongdoing? The starting point is the principle of separate corporate personality: once incorporated, a company can own property, enter contracts, sue and be sued in its own name, and incur liabilities distinct from those of its members.
This principle was established in Salomon v. Salomon & Co. Ltd. [1897] AC 22, where the House of Lords held that a company is a separate legal person from its shareholders. Nigerian courts apply the same principle. In Marina Nominees Ltd. v. Federal Board of Inland Revenue (1986) 1 NWLR (Pt. 16) 246, the Supreme Court recognised separate corporate personality but also confirmed that the corporate veil may be lifted in appropriate circumstances.
The general rule
A director is generally an agent or officer of the company, not the company itself. Contracts made by a director within the company’s authority are ordinarily contracts of the company, and the company—not the director—is the primary obligor. The Supreme Court made this point in Okolo v. U.B.N. Ltd. (2004) 3 NWLR (Pt. 859) 87, where it described a director as acting for the company as principal.
Accordingly, if a company borrows money, fails to pay suppliers, breaches a contract, or loses a commercial dispute, the creditor’s claim normally lies against the company. The director’s personal assets are not automatically exposed merely because the company cannot pay.
This protection encourages investment and enterprise. Shareholders and directors can take commercial risks through a limited-liability vehicle without placing their homes, savings, and personal property at risk for every corporate obligation.
When liability may arise
The corporate veil may be disregarded where a director uses the company to perpetrate fraud, evade a legal obligation, or achieve an improper purpose. In Oyebanji v. State (2015) 14 NWLR (Pt. 1479) 270, the Supreme Court explained that lifting the veil involves imposing personal liability on corporate officers, directors, or shareholders for the corporation’s wrongful acts.
A director may also be liable for breach of fiduciary duty. Section 305 of the Companies and Allied Matters Act 2020 provides that a director stands in a fiduciary relationship to the company and must observe utmost good faith in dealings with or on behalf of the company. Section 306 requires a director to act honestly, in good faith, and in the best interests of the company, while exercising the care, diligence, and skill of a reasonably prudent director.
A director who diverts company funds, awards contracts to personal entities without disclosure, misappropriates corporate assets, or places personal interest above the company’s interest may be required to account for profits, restore property, or compensate the company. Section 308(3) further provides that directors are individually and collectively liable for actions of the board in which they participated.
Fraudulent and wrongful trading
A serious personal exposure arises in corporate insolvency. Under section 672 of CAMA 2020, where a company is being wound up, and it appears that its business was carried on with intent to defraud creditors or for any fraudulent purpose, the court may declare that persons who were knowingly party to the fraudulent carrying on of the business shall be personally responsible, without limitation of liability, for all or any of the company’s debts.
Wrongful trading is closely related. Section 673 addresses circumstances where a director knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation but failed to act to minimise potential loss to creditors. A director found liable may be required to make a contribution to the company’s assets.
The distinction matters. Fraudulent trading requires dishonesty or intent to defraud. Wrongful trading focuses more on reckless continuation of business despite insolvency and failure to protect creditors. Both can expose a director personally, but fraudulent trading carries the more severe consequence of unlimited personal responsibility.
Regulatory and criminal liability
A director may also face personal liability under specific statutes. Tax laws, environmental laws, banking regulations, anti-money-laundering legislation, and sector-specific rules may impose duties directly on directors or officers. Where a statute expressly imposes responsibility on a director, the corporate veil does not prevent enforcement against the individual.
Criminal liability may arise where the director personally participates in, authorises, consents to, or neglects to prevent an offence committed by the company. The fact that the offence was committed in the company’s name does not necessarily protect the individual who directed or benefited from the wrongdoing. In Marina Nominees Ltd. v. Federal Board of Inland Revenue, the Supreme Court lifted the veil in a tax context and held directors personally liable.
Final note
Directors should treat corporate funds as company funds, document board decisions, disclose conflicts of interest, and avoid using the company to evade personal obligations. Where a company becomes financially distressed, directors should obtain professional advice early, review cash flow and creditor exposure, and consider restructuring, negotiation, or insolvency procedures rather than continuing to incur debts without a realistic prospect of repayment.
For creditors, the corporate veil should not be assumed to be impenetrable. Where there is evidence of fraud, asset stripping, misuse of company funds, or insolvent trading, it may be appropriate to plead facts supporting personal liability against the directors.
A company protects its directors from ordinary commercial risk, not from dishonesty, statutory breaches, or abuse of the corporate form. The veil protects legitimate business; it does not shield misconduct.