Is a Board Resolution compulsory before a Company files a Lawsuit in Nigeria?

The case of Hasal Microfinance Bank Limited v. BDA Limited & Anor (2023) LPELR-60313 (CA) serves as a landmark decision in reaffirming the importance of formal board authorization in litigation instituted by companies under Nigerian law. This article explores the legal implications of the case and underscores the critical need for corporate entities to comply with statutory requirements when instituting legal actions.

Background of the Case

The appellant, Hasal Microfinance Bank Limited (Hasal), had initiated an action at the High Court under the undefended list procedure to recover an outstanding loan granted to BDA Limited (BDA), which was guaranteed personally by the second respondent. However, the respondents raised a preliminary objection, challenging the competence of the suit. They argued that Hasal lacked the necessary locus standi to sue, as there was no board resolution authorizing the institution of the lawsuit.

The trial court upheld the respondents’ argument, dismissing the action as incompetent and an abuse of court process. Dissatisfied with the decision, the appellant sought redress at the Court of Appeal.

Issues at the Court of Appeal

The central issue before the Court of Appeal was whether the absence of a board resolution or authorization from the company’s general meeting rendered the action incompetent. The appellate court analyzed the provisions of the Companies and Allied Matters Act (CAMA) 1990, specifically Sections 63(3) & (5), 65, and 66(1), which outline the internal governance requirements for corporate decision-making.

The Court’s Decision

The Court of Appeal affirmed the trial court’s position that a company must have proper authorization before commencing legal proceedings. This authorization could take the form of a board resolution or approval from members at a general meeting, depending on the nature and circumstances of the action. Without such authorization, the court held, the company lacked the necessary locus standi, making the action incompetent.

However, the appellate court modified the trial court’s dismissal order to a striking out of the suit. This distinction is significant because it leaves room for the appellant to re-file the action once the requisite board authorization is obtained.

The Court of Appeal’s decision aligns with the general principle recognized by the Supreme Court in Haston Nigeria Ltd v. ACB Plc (2002) LPELR-1359(SC): that a company must authorize any suit filed in its name.

But the two courts had divergent views on the consequences of filing without prior authorization. The Supreme Court held that where directors act in the company’s best interests—such as preserving assets or managing accounts—this may amount to implied authorization, and any initial defect can later be cured by ratification at a general meeting. By contrast, the Court of Appeal in Hasal took a stricter position, holding that a suit filed without authorization is incompetent from the outset and can only be reinstituted after authorization has been obtained. This interpretation is supported by Sections 65, 244(1), and 279(3) of CAMA 1990, now contained in Sections 89, 269(1), and 305(3) of CAMA 2020 which collectively:

1. Empower directors to manage the company’s affairs;
2. Mandate collective decision-making by the board; and
3. Obligate directors to act in the company’s best interest.

A key issue arises from the apparent tension between the Court of Appeal’s decision in Hasal and the Supreme Court’s earlier ruling in Haston. Both courts agree that board approval is generally required before a company files a lawsuit, but they differ on the consequences of failing to obtain such approval.

In Haston’s case, the Supreme Court held that directors acting in the company’s best interest may imply approval, and any initial defect could be cured by subsequent ratification at a general meeting.

By contrast, in Hasal’s case, the Court of Appeal struck out the suit for lack of prior approval, indicating that a claim instituted without authorization is incompetent from the outset. While this does not prevent the company from re-filing once proper approval is secured, it rejects the notion that a defective action can be retrospectively validated by ratification.

At first glance, these positions appear to conflict. Since the Supreme Court’s ruling in Haston’s case remains binding, ratification is still technically permissible. However, until the Supreme Court revisits the issue, the prudent course for companies is to secure board or shareholder authorization before commencing any action, in line with the stricter posture adopted by the Court of Appeal in Hasal’s case.

Legal Implications and Process Improvement Practices

This decision has far-reaching implications for corporate governance and litigation practices in Nigeria:

1. Mandatory Compliance with CAMA: Sections 89 and 90 of CAMA 2020 emphasize the requirement for internal approvals before a company undertakes significant actions, including litigation. This case reaffirms that courts will strictly enforce these provisions.
2. Locus Standi in Corporate Litigation: The concept of locus standi, or the legal capacity to sue, is fundamental. For companies, this capacity hinges on proper internal authorization, without which legal actions may be struck out for incompetence.
3. Corporate Governance Standards: The decision underscores the importance of adhering to corporate governance standards. Companies must ensure that their actions are backed by appropriate resolutions (board or shareholder, as may be applicable) to avoid procedural pitfalls.
4. Practical Guidance for Companies: Companies must secure board authorization before initiating legal proceedings. This can be done through a board or general meeting resolution, or via a written resolution signed by all directors entitled to notice under Section 289(8) of CAMA 2020. Written resolutions offer a quick and efficient alternative to physical meetings. All authorizations should be properly documented and frontloaded with the originating processes when tendered in court, ensuring the company’s locus standi is clearly established.

Conclusion

Hasal’s case highlights the necessity of observing statutory requirements and internal governance protocols before initiating legal actions. Failure to do so can result in unnecessary delays, additional costs, and the potential dismissal or striking out of suits.

Board authorization is not merely a procedural formality but a legal necessity that ensures corporate actions align with statutory and internal governance requirements. The decision in Hasal Microfinance Bank Limited v. BDA Limited & Anor (2023) LPELR-60313 (CA) reinforces this principle, serving as a reminder to corporate entities to prioritize compliance with the law in all their operations. By doing so, companies can safeguard their legal standing and ensure that their actions are both procedurally and substantively sound.

This guide is intended to provide general information on the subject matter and does not, by itself, create a client-attorney relationship between readers and Hamu Legal, nor does it serve as professional legal advice.

We are available to provide specialist legal advice on the readers’ specific circumstances when they arise. For further enquiries, please reach out to our Company Secretarial team at yewande@hamulegal.com or cosec@hamulegal.com.