Assessment of the Challenges of Company Incorporation in Nigeria

ABSTRACT

Prior to the advent and interference of the Europeans especially the British into the affairs of the geo-political entity called Nigeria, company and the body of rules (common law and statutory) regulating it are unknown to the indigenous system of law in Nigeria. However, through evolution, the company business has come to stay in Nigeria. The historical foundations of company incorporation in Nigeria gave insight into the introduction of the limited liability companies through the 1855 companies Act, the abolition of the provisional registration and the replacement of the deed of settlement in the 1856 Companies Act. The 1912 Companies Ordinance is the first indigenous companies’ statute in Nigeria and later the post independent 1968 Companies Act which introduced compulsory foreign registration in Nigeria and finally the 1990 CAMA that established the Corporate Affairs Commission (CAC) as the regulating body empowered to regulate the affairs of companies in Nigeria today. A company is a legal entity made up of an association of people, be they natural, legal, or a mixture of both, for carrying on a commercial or industrial enterprise.

A company comes into existence through the process of incorporation as laid down by the regulating agency. Incorporation of companies in Nigeria has passed through many challenges including delay in registration and problems associated with the provisions of the CAMA. This study assessed the challenges of company incorporation in Nigeria. The study looked into the historical foundations of company incorporation; the significance of company incorporation; the various challenges of company incorporation and finally it provided the remedies for these challenges. The methodology employed in this work is descriptive, analytical and comparative. The findings of this study were that most of the delays in company incorporation were caused by factors within the CAC itself and those outside its control including statutory deficiencies. This study recommended among others that the delay in company incorporation in Nigeria should be redressed by the CAC through updating and expanding their servers to accommodate the pressure expected during online registration, and that some of the provisions of the CAMA should be reviewed.

CHAPTER ONE

GENERAL INTRODUCTION

1.1 Background of the Study

In Nigeria today the law governing the administration of the company formation is the Companies and Allied Matters Act (CAMA). The Corporate Affairs Commission (CAC) is the body set up by section 1(1) of CAMA to administer the Act including the regulation and supervision of the formation, incorporation, registration, management, and winding up of companies under or pursuant of the Act. Principally, the Corporate Affairs Commission is one of the innovations of CAMA that gives the Commission the responsibility of incorporation of companies, registration of Business Names, Incorporation of Trustee of certain committees, bodies, associations and other regulations. CAMA also introduced Corporate audit Committee, insider trading, and went ahead to codify the duties of directors. A Company, therefore, refers to an association of persons incorporated under companies’ legislation and in the case of Nigeria, under the CAMA.

A company comes into existence generally by a process referred to as incorporation. Once a company has been legally incorporated, it becomes a distinct entity from those who invest their capital and labour to run the company. The company is an artificial person and has separate legal personality. It has almost all rights as a natural person. It can own property, sue and be sued, has perpetual succession. However, since the advent of the corporate form, the extent to which corporations or companies should bear the same rights and duties as individuals has engaged corporate law scholars and the courts.

The long-standing debate surrounding the nature of corporate personhood has focused on three basic perspectives:

(i) the concession or “artificial entity” theory, which sees the corporation as a creation of the state or sovereign that grants its charter .

(ii) the aggregate theory, which sees the corporation as a fictional construct representing the sum of its share-holders, managers, and other constituencies who contribute to the success of the corporate enterprise; and

(iii) the real entity view , which sees the corporation, not as an extension of the state or of its many constituencies, but as having a separate identity independent of both. Owing to the heritage of English corporate law, the corporation has been recognized throughout the history of the Nigeria as a legal person that enjoys certain rights and obligations independent of its shareholders. Theories of the corporation speak particularly of the contested issues that centre on which rights and duties must be reserved for natural persons and the rationale for such distinctions. The term corporate theory refers to attempts to provide a coherent conceptual framework within which the existence of corporations as social, economic, and political phenomena can be explained, and the consequent implications for their external regulation can be asserted.

The concession theory most accurately reflects the historical origins of the corporation and was the predominant view in the United States until the late nineteenth century. This understanding was perhaps most famously articulated by Chief Justice Marshall in Trustees of Dartmouth College v. Woodward “A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. . . . Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it.” Any act of the corporation beyond the permitted scope contained in its charter was “beyond the power” of the corporation or “ultra vires.” The ultra vires restriction limited not only the corporation’s scope of operation, but its economic power and influence in society as well. Because the corporation’s authority was derived from the state, many early charters were granted to corporations to enable them to advance public purposes rather than strictly profit-making objectives, although commercial ventures also proliferated. By the late 1800s, New Jersey State in the United States of America, and later other states, began to enact general incorporation statutes that facilitated the growth of profit making corporations. In time, the removal of many of the public welfare limits from state corporate codes and the ultimate decline of the ultra vires doctrine rendered the concession view largely obsolete.

Another theory of the corporation that emerged during the early twentieth century was the Aggregate Theory, which emphasized the objectives and interests of the individuals who formed the corporation. This approach was a natural outgrowth of the emphasis on freedom of contract presumed by the incorporation statutes and was also inspired by massive changes in the economy. The end of the nineteenth century was a time when the growth of large-scale ventures, such as railroads, steel and oil companies, that required capital from a broad base of investors was revolutionizing the scale of American business. The aggregate theory therefore resonated with a growing sense that economic activity was private activity that should be free from interference by the state, with market forces and private contracting, not state fiat, defining the corporate form.

The next theory was the Real Entity Theory. Like the aggregate theory, the “real entity” theory developed in response to the decline of state chartering, as corporate activity came to be seen as private rather than public, and corporate persons came to be viewed as sharing many of the rights and obligations of natural persons. In contrast to the aggregate theory, however, the “real entity” theory posits that the corporation’s separate legal personality as a matter of formal structure in fact represents a separate identity that is more than the sum of the constituencies which contribute to its operations. This theory was recognized by the courts in the early 1800s and came into its own in the early twentieth century when the Berle-Means firm , characterized by a large body of dispersed shareholders and a concomitant separation of ownership and control, became common place across the economy.

Since the rise of the law and economics movement, dominant thinking about the nature of the corporation has coalesced around an aggregate theory of the corporation that sees the corporation as a “nexus of contracts.” Under this nexus of contract approach, the corporation has no separate identity of its own, but is an artificial construct representing the sum of the various contracts between shareholders, managers, creditors, and other resource providers, who explicitly or implicitly negotiate the terms of their participation in the corporate enterprise.

Initially, the nexus of contracts approach focused primarily on shareholders’ interests and their role as monitors and enforcers of the corporate contract. Later scholars, however, expanded the constituencies whose contracts “mattered” to include employees, customers, and other stakeholders. A prominent example of the latter view is the team production theory of the firm advanced by Margaret Blair and Lynn Stout.

The real entity theory has fallen out of favour among corporate law scholars as an improper reification of the corporate form. Nonetheless, the legacy of the real entity view remains today in modern corporate codes and common law doctrines most notably the business judgment rule that give directors discretion to act independently of the will of the shareholders. Statutory arenas ranging from criminal law, to securities regulation, to antitrust, as well as certain areas of constitutional law, also reflect the view that the rights and duties of the corporate entity are distinct from those of the corporation’s officers, directors, and other constituents. The CAMA which is the governing legislation or statute for company incorporation still reflects this real entity theory in the documents for company registration. The Corporate Affairs Commission is the only agency of government charged with the responsibility of registration of Companies, Business names and Incorporated Trustees and is a creation of the CAMA.

Basically, four types of companies are recognized for business ventures in Nigeria, namely:

1. Private Limited Company (LTD).

2. Public Limited Company (PLC).

3. Companies limited by guarantee and

4. Unlimited Companies.

The minimum membership for each of these companies is two and the maximum for private companies is fifty members while there is no upper limit for public companies. A minimum share capital of Ten Thousand Naira is prescribed for private companies and Five Hundred Thousand Naira for public companies with a minimum subscription of 25% of the shares. Foreign companies intending to do business in Nigeria may apply for exemption from registration especially those undertaking special projects. Companies seeking exemption are to forward their applications to the Secretary to the Federal Government of Nigeria.

The memorandum of association is the main document by which the registration of a company is achieved and the provisions contained within the memorandum will prevail over any conflicting provisions contained in the articles of association. The memorandum of association has five compulsory clauses:

1. The name clause;

2. The object’s clause;

3. The liability clause;

4. The capital clause; and

5. The subscription clause.

The articles of association binds a company with its members and contains a company’s internal rules and regulations. The provisions contained in Table A of the First Schedule of the CAMA apply to companies unless they are altered or excluded by the articles of association. The model articles contained in Table A are inappropriate for many private companies and the majority of companies will adopt a modified version of Table A as their articles. When the Memorandum and Articles are of Association of the proposed company and other necessary documents are ready, the process of registration commences at the CAC Headquarters or any of the branch offices nation-wide.

The procedures for incorporation commences with the names search to ascertain if the name of the proposed company is available and not already in use. The search costs N500 (Five hundred Naira) and if your name is available you can reserve it for 60 days. The next is to register details of the shareholders. The information which you will need to present include – the name of the shareholders, residential address, occupation, email address and mobile phone number. You will also need to provide a recognised identity document e.g. international passport, drivers licence, national identity card etc. After this comes the documentation. The documents required for the registration of a company include: The Memorandum and Articles of Association; the Notice of registered address of the business; the List, particulars, and consent of the first Directors of the company; and the Statement of compliance by legal practitioner. The final stage is the payment, submission and picking up the certificate of incorporation. There are many challenges which experiences by operators and practitioners in the process of company incorporation are.

The process of incorporation of companies with the CAC are not always very smooth. There have been complaints of delay during the process of registration and other institutional challenges which has prompted this study. This study seeks to assess the challenges of company incorporation in Nigeria.

1.2 Statement of the Problem

A company comes into existence through the process of incorporation. To incorporate a company in Nigeria, the Corporate Affairs Commission (CAC) sets out the process or the procedure for incorporation. The procedure varies depending on whether you want to incorporate a public company or a private company. The procedures also differ in other selected commonwealth countries such as the United Kingdom and south Africa. However, the objective of incorporation is similar since an incorporated company has many advantages of corporate existence.

One of the challenges of company incorporation with the Corporate Affairs Commission is the delay in the registration of companies. Most of the time, it takes an average of 3 (three) months to register a company. The ordinary names search takes not less than one week. This could be done within an hour electronically if the severs at the CAC are operational. Sometimes in 2013, the CAC came up with the idea of 24 hours company incorporation service. This did not work as the Commission was not able to keep up to the promise. Agitations are regularly being mounted for the CAC to improve on the time it takes it to incorporate a company.

Some customers who want to incorporate companies have been asking why there should be two or more persons to form a company. It should be acknowledged that the CAMA in section 18 made this mandatory. The only plausible response to such questions from customers is that it is the provision of the law. But ordinarily, we should appreciate that most of the incorporated private companies are being owned and managed by one person. The names of the other members of the company are just included in the membership list to satisfy the requirements of the law. However, this continues to be a challenge to those who are engaged in company incorporation till date.

One of the documents to be submitted in the process of company incorporation is the Memorandum and Articles of Association. The Memorandum contains the object clause as one of the clauses to be supplied by the promoter or subscriber. The object clause details out the area of business in which the proposed company would engage in. Any business not listed in the object clause be beyond the powers of the company and would therefore be ultra vires the company if so engages in it after incorporation. The ultra vires doctrine restricts an incorporated company under the Companies Acts as enacted both in United Kingdom in 1985 and 1989 and Nigeria in 1990. In Nigeria, it was provided for in the repealed Companies Act of 1968 and more recently in the Companies and Allied Matters Act.” CAMA provides that except to the extent that a company’s memorandum or any enactment otherwise provides, every company shall, for the furtherance of its authorized business or objects, have all the powers of a natural person. The ultra vires doctrine is thus recognized and technically enacted in the Act. Some customers registering company find this abnormal since situation could warrant a company to diversify its operations even outside businesses not listed in the object clause.

One of the requirements for incorporation is a statutory declaration put together by a lawyer stating compliance with all the requirements for the registration process. Most of those engaged in company incorporation are not satisfied with this statutory provision. Why must a lawyer do so and not a Director or Secretary of the company? What is the function of the CAC in the incorporation exercise? One of the responsibilities of the CAC is to check that all the necessary requirements for registration are satisfied. Also what are the consequences of this declaration of compliance by a lawyer becoming false? Will the lawyer be charged for perjury since this declaration must be sworn to? How many lawyers have been prosecuted for such false declaration by the CAC? These problems have profoundly engaged the researcher, hence this study to assess the challenges of company incorporation in Nigeria.

1.3 Research Questions

This study will address the following questions:

1. What are the historical foundations for company incorporation in Nigeria?

2. What are the significance or the benefits of company incorporation in Nigeria?

3. What are the challenges of company incorporation in Nigeria?

1.4 The Aims and Objectives of the Research

The aim of the study is the assessment of the challenges of company incorporation in Nigeria. This study has the broad objective of assessing the challenges of company incorporation in Nigeria. The specific objectives are as follows:

1. To discuss the historical foundations for company incorporation in Nigeria.

2. To identify the benefits of company incorporation in Nigeria.

3. To identify the various challenges of company incorporation in Nigeria.

1.5. Significance of the Research

This work assesses the challenges of company incorporation in Nigeria. When this study is successfully completed, students, Lecturers, and researchers will benefit from it as they will find the recommendations useful. Those in position of authority who find themselves privileged to make policies shall find the work helpful. The historical foundations for company incorporation in Nigeria serve as the bases for the current statutory legislation which guide company business in Nigeria. The corporate theories which we highlighted in this work refer to attempts to provide a coherent conceptual framework within which the existence of corporations as social, economic, and political phenomena can be explained, and the consequent implications for their external regulation can be asserted. The CAMA which regulates company formation in Nigeria is a product of legislation and company operations are therefore subject to the provisions of the statute. The challenges which confront operators of company incorporation will be highlighted and recommendations made in this study for their possible solutions.

1.6 Research Methodology

The study applies descriptive, analytical and comparative designs. Reliance will be placed on the use of primary data such as legislative enactments and other legal instruments of both international and national laws for the study. The researcher will rely on the use of secondary data such as case laws, text books, and other legal research and academic materials such as journals, newspapers, magazines, Internet sources, law reports, unpublished works, decided cases, DVDs, etc where available for this study. Analysis of expert opinions in literatures and juridical authorities from institutional documents shall also be used.

1.7 The Scope of the Study

This study focuses on assessing company incorporation challenges in Nigeria. It is actually not a study of the generic concepts of incorporation of companies or the remedies for abuses of company incorporation. The work does not go deeper into analysis of all legal safeguards of company incorporation; however it will make a brief revelation of the historical foundations of company incorporation, the benefits, and challenges of company incorporation in Nigeria. The greatest limitations are finance for the study and the constraint of time to which direct visit to many corporate bodies would not be possible in order to have access to their files or records. The research therefore will involve looking into literatures and statutory enactments and the internet to get information on matters of interest.