Oral agreement of the directors of a company to share the profits with a person: effect of bankruptcy of the company



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 experience and his political contacts to gain business advantage and expansion for the company. A and B orally agreed with C that the profits made by the company would be shared equally with C and that C would be appointed director of the company. Building on that agreement, C went a long way toward securing a contract for the company that caused A to commend C’s effort in a letter.

Consequently, C was appointed and instructed to act as Director of Business Development (DBD) of the company and other steps were taken to ensure that C was appointed director of the company as agreed orally by all parties. But no written resolution was ever passed to make C a director, nor was the company’s register of directors changed.

Consequently, the company was awarded a contract in which it made a total profit of N60,000,000 (only sixty million naira). Surprisingly, A and B refused to share these benefits with C.


The scope of this article is to: identify related legal issues arising from the scenario; and assess the legal issues identified in light of existing legal principles (statutory and judicial). In addition, a brief attempt will be made to advise C on the strength or otherwise of his case.


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

2. If it can be said that C is a partner of A and B.

3. If C was an employee or worker of the company.

4. If C is entitled to participate in the income obtained by the company


1. If C was legally a director of the company:

In general, the question of who is a director of a company is more a question of law than of 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’. Without a doubt, the role of directors is as fundamental to the well-being of a company as blood is to the survival of the human body. Perhaps for this reason, company statutes around the world provide special provisions on the procedures for appointing and dismissing a director.

In light of the foregoing, it can be safely stated that C was not a director of the company because he was never validly appointed as such. Although, C was appointed as the Business Development Director (DBD) of the company, but nothing was done to modify the necessary company records in the Corporate Affairs register (CAC). In other words, the designation of C as DBD without presenting the necessary modifications in the company’s directors’ registry was a mere expression of will that was never perfected in law.

2. If it can be said that C is a partner of A and B:

According to Section 3 of the Lagos State Companies Act, the partnership is the relationship between persons carrying on business in common with a view to profit. From the legal definition above, a partner can be said to be a person who conducts business with other partners. It is imperative to examine the various statutory rules that determine the nature of the company. Article 4 of the Companies Law establishes as follows:

(a) “Joint tenancy, tenancy in common, joint ownership, common ownership, or partial ownership does not of itself create a partnership as to anything owned or owned, whether tenants or owners share or not the profits obtained by the use of the same.

(b) The distribution of gross returns does not by itself create a partnership, whether or not the persons sharing such returns have a joint or common right or interest in any property from which or the use of which the returns are derived. .

(c) The receipt by a person of a part of the profits of a business is prima facie evidence that he is a partner in the business, but the receipt of such a part or of a payment contingent on varying with the profits of a business, does not in itself make you a partner in the business; and in particular –

(I) the receipt by a person of a debt or other amount settled in installments or otherwise from the accumulated profits of a business does not in itself make him or her 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 business for a portion of the profits of the business does not by itself make the servant or agent a partner in business or liable as such;… .”

From the foregoing it follows that the partnership is a matter of express agreement between the partners because the law ordinarily will not presume the existence of a partnership between persons doing business together. Suffice it to say then that: the mere contract entered into with a servant or person in exchange for remuneration or participation in the profits of the company does not ipso facto convert such servant or person into a partner.

It should be noted that the case of C falls within the scope of Section 4 (c) (ii). The legal implication of this is that C was a servant of the company who had a right to share in the company’s income. But he was not a partner in the strict legal sense.

3. If C was an employee or worker of the company:

It is imperative to first examine the Labor angle of the relationship that existed between the company and C before considering the strictly contractual aspect of the relationship. Accordingly, Section 91 of the Labor Law, ’employment contract’ 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 worker.

In the same sense, the Law defines a worker as “any person who has entered into or works under a contract with an employer, whether the contract is for manual or office work, whether express or implied, oral or written, and whether it is a service contract or a personal contract to perform any work or work…”

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

”…a contract of employment connotes a contract of service or apprenticeship, whether express or implied, and if express, whether oral or written.”

Therefore, C was a worker or employee of the company because he actually worked for the company. In other words, enough instructions and instructions were given to C that point to the fact that C was working for and on behalf of the company when he was working as the company’s DBD.

From another point of view, the facts that concern us can also be approached from the sense of strict contractual agreement. It is trite in the law that the 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 the offer, the acceptance, the consideration and the intention to enter into legal relations… Once the offer is unconditionally accepted, a valid contract exists.”

Likewise, in the case of Dragetanos Const. (Nig.) Ltda. v. FMV Ltd & Ors., the Court of Appeal held as follows:

”… it is opportune and necessary to reaffirm the principle enshrined and rooted in the Law of Contracts that, ‘pacta conventa quae neque contra leges neque dolo malo inita sunt, omni modo obsevanda servanda sunt’, in other words, agreements Contractual agreements that have not been fraudulently or illegally entered into by the parties must be observed or enforced in all respects.

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

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

In light of the above, it is safe to say that a contract can be established between the company and C as evidenced by the various instructions given to C by A, the CEO of the company. Of course, the actions of the parties clearly show that there was an offer, acceptance, consideration and intention to create a legal relationship between all parties. Therefore, the decision of the company and the subsequent joint efforts made by all parties to secure a contract constitute a subsisting and enforceable contract between the parties.

4. If C had the right to participate in the income obtained by the company:

This issue primarily deals with the determination of C’s remuneration. Although the amicable oral understanding between the parties on profit sharing was not contained in any written “Profit Sharing Agreement”, the profits will be shared equally because the parties they had agreed orally. shared. However, it should be noted that an evidentiary problem may arise 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) between A, B and C, the capital will still allow C to participate in profits based on C’s capital stock.

Therefore, it is safe to say that C is entitled to his own share of the company’s income due to his sweat capital (he actively contributed in the contract from which the company earned N60m). In fact, it was incorrect for A and B to convert only all the income earned by the company.


In light of the above, C can sue for breach of employment contract, or simpliciter breach of contract that can be deduced from the circumstances of both the actions and the relationship of the parties. As answered in the legal provisions above, the question of what constitutes an employment contract is a question of law. Of course, the exact remuneration of C is the same proportion as A and C of the total profits obtained by the company from the contract made by A, B and C.


It is imperative to state that C’s case has a very weak basis in company law, but may have a remedy for breach of employment contract because there was in fact employment. More specifically, as noted above, C can sue for breach of contract simpliciter because, in fact, there was subsisting contact between the parties.

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