Infringement of Personal Rights of Shareholders: Locus Standi to Sue
Facts
The 1st to 4th Respondent owned 95% of the share capital of the 1st Appellant, while the 2nd Appellant owned the balance of 5% of the two million ordinary shares of the company; it was duly incorporated as a limited liability company under the provisions of the Companies and Allied Matters Act (CAMA). By an ordinary resolution passed on 1st April 2002, the share capital of the company was increased to ten million.
The 1st, 2nd and 4th Respondent as well as the 2nd Appellant, were the original directors of the company. It was alleged that the company held board meetings on the 9th and 10th March, 2006 whereby the 1st Respondent was removed as Chairman, and his official residence and vehicle withdrawn. The Respondents contended that, due process was not followed in the said removal. Another board meeting was conducted on 4th April, 2006. Notwithstanding the fact that the 1st to 4th Respondent were not given notice of the meeting and the members present were unable to form a quorum, the decisions were taken by the 2nd Appellant. At another board meeting held on 6th October, 2006, the names of the 1st to 4th Respondent were removed as signatories to the company’s accounts. The houses allocated to the 1st and 4th Respondent, were put up for sale. The 1st to 4th Respondent were suspended, and their salaries stopped. It was alleged that the 1st to 4th Respondent, were by all the actions complained of, deprived of their rights as shareholders, directors, and management staff of the company without notice to them, and without being given the opportunity of being heard.
As a result, the 1st to 4th Respondent instituted an action against the Appellants seeking inter alia, a declaration that once the 1st Appellant has fully allotted its authorised shares, the shareholders to whom the same were allotted can only transfer the shares to another person through a proper instrument of transfer, and not by a resolution of the company. The Appellants, upon being served with the Writ of Summons, filed a motion on notice challenging the jurisdiction of the court to entertain the suit on the grounds, inter alia, that the 1st – 4th Respondent lacked the locus standi to initiate, maintain and sustain the action as constituted. The trial court in its judgement, granted the application of the Appellants, dismissing the Respondent’s action. Dissatisfied, the 1st – 4th Respondent successfully appealed the decision at the Court of Appeal. The appellate court held that, the 1st- 4th Respondent had the locus standi to sue the Appellants for infringement of their legal rights. The Appellants appealed the decision to the Supreme Court.
Issues for Determination
The following issues were considered for determination by the Apex Court -
1) Whether the Court of Appeal was right, when it held that the 1st to 4th Respondent possess the locus standi to institute the action.
2) Whether the Court of Appeal was right when it held that it was not necessary for the 1st to 4th Respondent to seek and obtain leave of court to institute the action, as same was not a derivative action.
Arguments
On the first issue, counsel for the Appellants submitted that a Plaintiff would only have locus standi, where the reliefs sought would confer some benefits on him. He contended that it is the Statement of Claim alone that determines whether a Plaintiff has the locus to institute the action, and that the locus standi of a Plaintiff is fundamental and touches on the competence of the court to adjudicate. He referred to paragraphs of the Statement of Claim, and argued that the 1st - 4th Respondent’s cause of action centres on irregularity in the allocation of unallotted shares of the 1st Appellant, the change of signatories to the 1st Appellant’s bank account, and illegal conduct of the 1st Appellant’s affairs by the 2nd - 5th Appellant. He asserted that the complaints reflect the wrong done to the 1st Appellant as a corporate body, and not a violation of the individual rights of the 1st to 4th Respondent. He submitted further that, the complaints relate to the internal management of the company which the courts refrain from interfering with.
Countering the submission, counsel for the Respondents argued that while the general rule in FOSS v HARBOTTLE, as codified in Section 299 of CAMA, is that where there is an irregularity which occurs in the course of a company’s affairs, only the company is competent to sue, there are exceptions to the rule which have evolved through case law, and eventually codified in Section 300 of CAMA. These provisions protect the rights of members of a company who are personally aggrieved by the conduct of its affairs. He argued that the originating processes of the 1st – 4th Respondent disclose the necessary locus standi, and that the Memorandum and Articles of Association of the 1st Appellant have been breached as the actions complained of affect the personal rights of the 1st – 4th Respondent. He submitted that a holistic appraisal of the Statement of Claim reveals that, the cause of action was the protection of the 1st - 4th Respondent’s personal rights which they sought to enforce. He relied on the case of C.B.N. v KOTOYE (1994) 3 NWLR (Pt. 330) 66 at 75-76 H-B and 770, where it was held that, the rule in FOSS V HARBOTTLE cannot override clear statutory provisions to the contrary, or affect the rights and obligations conferred by the Constitution, and that it will not apply to an action instituted to protect the invasion of personal rights of an individual member qua member of a company.
Regarding the second issue, counsel for the Appellants contended that the 1st - 4th Respondent’s suit is a derivative action, for which the prior leave of the court ought to have been obtained before it was instituted. Referring to the decision in AGIP NIG. LTD v AGIP PETROL INT’L (2008) 5 NWLR (Pt. 1187) 348 at 393 G-H, he argued that the various reliefs sought show that they are not for the protection of the individual rights of the Plaintiffs, but beneficial to the 1st Appellant who seeks to redress wrongs committed against it. Counsel submitted that the action ought to have been commenced by Originating Summons, and not by a Writ of Summons and Statement of Claim. He argued that where, by a rule of court, the doing of an act or taking a procedural step is a condition precedent to the hearing of a case, the rule must be strictly complied with, as non-compliance is not a mere irregularity but a fundamental issue that goes to the root of the jurisdiction of court. He referred to AMAECHI v INEC (2008) 5 NWLR (Pt. 1080) 227 at 437 H-A, and Section 303(1) and (2) of CAMA. Counsel opined that the trial court was right in holding that the suit was a derivative action, and failure to commence the suit by Originating Summons rendered it incompetent. He urged the court to set aside the decision of the Court of Appeal.
In response, counsel for the Respondents submitted that a derivative action is an action brought to protect the interest of a company, and that the reliefs in a derivative action are sought for the benefit of the company. He submitted that the suit is not a derivative action requiring prior leave, and assuming the suit was commenced by a wrong mode, it was not sufficient to defeat the action.
Court’s Judgement and Rationale
In deciding the first issue, the Supreme Court held that locus standi connotes the legal capacity to institute an action in a court of law. It is a threshold issue that affects the jurisdiction of the court, to look into the complaint. In determining whether the Plaintiff has the necessary locus standi to institute the action, it is his pleadings that would be considered by the court. Their Lordships held further that, standing to sue does not depend on the merit of the claim, but on the interest of the Plaintiff in the subject-matter of the suit. In this case, it is evident that the pleadings, along with the reliefs sought, are to the effect that the Plaintiffs have suffered personal injury arising from the interference by the Appellants with their rights as shareholders, directors and management staff of the 1st Appellant, without recourse to them.
The Supreme Court considered Section 41 of CAMA, juxtaposed with the relevant paragraphs of the Statement of Claim, in reaching its decision that the suit relates to breach of the obligations owed the 1st to 4th Respondent (as Plaintiffs) under the Memorandum and Articles of Association, as individual members and officers of the company. The Apex Court also held that the rule in FOSS v HARBOTTLE is inapplicable in the present circumstances, as the complaints are not complaints of wrongs done to the company, but denial of rights to notice of meetings where decisions affecting the individual rights of the 1st – 4th Respondent were taken. The court held that the provisions of Section 300 of CAMA do not only restrain a company from taking steps which are illegal or ultra-vires and applicable to completed rights; the said provisions relate also to injunctive and declaratory reliefs in respect of acts or omission affecting the Applicant’s individual rights. On the application of the fair hearing provisions under Section 36(1) of the 1999 Constitution to company proceedings, the court held that since the Memorandum and Articles of Association of a company makes provisions for giving of notice of meetings to shareholders, it follows that those entitled to receive such notice of meetings are entitled to participate in decision making of the company. The law is that, even proceedings of a non-judicial or administrative body, must be conducted in accordance with the principles of natural justice – ADENIYI v GOVERNING COUNCIL OF YABATECH (1993) 6 NWLR (Pt. 300) 426. Concluding on the issue, the court held that the 1st – 4th Respondent had the requisite locus standi to institute the action.
Regarding the second issue, the Supreme Court held that, the suit of the 1st - 4th Respondent does not seek to redress any wrong done to the 1st Appellant, but to protect and enforce their individual rights, and therefore, it cannot be regarded as a derivative action which requires prior leave for the suit to be properly instituted. The Apex Court also held that the said suit was properly commenced by Writ of Summons and Statement of Claim, and was therefore, competent.
“IN DETERMINING WHETHER THE PLAINTIFF HAS THE NECESSARY LOCUS STANDI TO INSTITUTE THE ACTION, IT IS HIS PLEADINGS THAT WOULD BE CONSIDERED BY THE COURT….. STANDING TO SUE DOES NOT DEPEND ON THE MERIT OF THE CLAIM, BUT ON THE INTEREST OF THE PLAINTIFF IN THE SUBJECTMATTER OF THE SUIT”
Appeal Dismissed.
Representation
A.M. Kayode with C.I.A. Ofoegbunam and A.F. Obiwumma for the Appellant.
Kehinde Ogunwumiju, SAN with Olumide Adekunle, Saadu Lukman and Funmilayo Longe for the 1st to 4th Respondent.
Olayinka Adedeji for the 5th Respondent.
O.O. Olowolafe with O.O. Owonla for the 6th Respondent.