Did The Minister for Finance Flout Corporate and Banking Rules for Political Interests?

The Minority in Parliament  on 5 September 2017 gave a press release with respect to an approval given by the Minister of Finance (“Minister”) concerning a credit facility taken by McDan Shipping Company (“McDan”) from the Agricultural Development Bank (“Bank”).  According to the government, the Bank (through its Managing Director) sought the approval from the Minister of Finance to disburse the loan because the Bank did not have a board in place. The Minority questioned the Minister of Finance’s capacity to approve the loan to McDan and further intimated that the Minister’s actions flouted corporate governance rules in Ghana.

In my view, there are three main issues that arose with respect to the facility, namely:

• Whether the Minister of Finance exceeded his powers in the absence of a newly constituted Board of Directors?
• Whether the transaction was ultra vires the Bank?
• Whether McDan would be liable if there was a breach in the internal rules of the Bank?

Discussion

Whether or not the Minister of Finance exceeded his powers in the absence of a newly constituted Board of Directors in approving the loan?

As is customary, a director of a company has a fiduciary relationship to the company and is required to observe the utmost good faith towards the company in any transaction with it or on its behalf.  In performing their duties, directors must ensure that they act within the regulations of the company and adhere to all enabling legislations, which regulate the affairs of the company.

Section 180 of Ghana’s Companies Act 1963 (Act 179) requires that a company incorporated in Ghana must have at least two directors. A company that operates for more than four weeks with less than two directors is liable to a fine not exceeding GH¢300 for each day the company transacts business with less than two directors.

Section 180 of Act 179 must be scrutinised in conjunction with the Presidential (Transition) Act, 2012 (Act 845). Section 14 of Act 845 provides that persons who are appointed to the Board of State Owned Corporations by the President or a Minister of State lose their position on the Boards of State Owned Corporations when a new President of Ghana is sworn into office.

However, this does not mean that all the directors of the company lose their position in a public company, which is not wholly owned by the government of Ghana. It is plausible that where the Government of Ghana is a shareholder of a public company the regulations of the company will prescribe that it has the right to appoint directors to the Board of the company as other shareholders. Thus, directors appointed pursuant to the Regulations of the company are not affected by Act 845. Those directors can only be removed via the provisions of the Regulations of the company and/or section 185 of Act 179. This procedure involves the passing of an ordinary resolution at a general meeting of the company where the director is entitled to be heard on the resolution at the meeting. The notice for the meeting must be sent not less than thirty-five days before the meeting at which the resolution for the removal of the director is moved. The director may send a written statement on his/her removal to the company before the meeting is held. This goes to the natural justice rule on fair hearing.

Agriculture Development Bank’s 2015 annual report indicates that the Bank’s Board was made up of nine directors.  The Bank then had two shareholders namely: Government of Ghana, holding 51.83% of the shares and Financial Investment Trust holding 48.17% of the shares. According to a Joy Business report on June 26, 2017 the Bank’s shareholding changed after its initial public offering in 2016. The Bank’s shareholding structure is now: Government of Ghana owning 32.3%; Belstar Capital owning 34.3%; Starmount Development Company owning 11%; EDC owning 6% and Bank of Ghana owning 9.5% of the shares.  The Joy Business report also stated that shareholders had amended regulation 74a of the Bank’s regulations to allow shareholders with a shareholding of 10% to nominate directors to the 9-member Board. Thus, only the Government’s nominees to the Board will be affected by the provisions of the Act 845 because the other shareholders who appoint directors to the board of the Bank are private institutions. Act 845 therefore, does not apply to them.

In addition, it is typical of Banks to have a credit committee made up of some directors of the Board to recommend to the Board the approval of certain credit transactions. The Bank’s regulations may prescribe limitations on the amount of credit the committee or the management can recommend for approval by the Board for an individual customer.  Some minor issues, which may arise in the event that the Bank had a credit committee include:

1. Whether or not ADB’s regulations prescribes any limitations on the amount of credit, which the credit committee could approve.
2. Has the composition of the credit committee changed by virtue of the Presidential Transition Act.
3. Whether or not shareholders of the Bank may approve a credit facility in the absence of the Board of Directors?

A reading of the Bank’s letter to the Minister of Finance on June 6, 2016 signed by the Bank’s Secretary, indicates that the Bank’s credit committee “considered and recommended” for approval by the Board, McDan’s credit facility. The wording of the letter suggests that the there is a limitation on the amount of credit the committee may recommend for approval to the Board. Hence, the Bank wrote seeking authorization from its shareholders in the absence of a Board.

A company acts through its members in a general meeting or through its directors in a manner prescribed by the regulations of the company. Section 137(3) however, states that the business of the company shall be managed by the directors unless the regulations or Act 179 prescribe otherwise. Thus, directors of the company are not bound to obey instructions from shareholders once that particular matter has not been specifically spelt out in the regulations or Act 179 as something to be determined by shareholders.  Professor Gower explains that it is not feasible for day-to-day decisions to be taken by members in general meeting because of the time constraints in conveying general meetings.He stated:

“The members must leave the directors to get on with the job. If they make a mess of it the remedy of the members is to sack the board and install another that they can trust. And if the members are not prepared to entrust the board with the exercise of any particular powers (e.g., borrowing in excess of a prescribed amount) these powers can be removed from the directors and vested in the general meeting by a provision to that effect in the Regulations either as originally framed or as altered (though an alteration will, of course, require a special resolution – Section 22.”

Despite the explicit provision of Section 137(3), Section 137(5) allows shareholders to act in the absence of a board. The shareholders at a general meeting may take a number of actions, which includes acting in a matter if the members of the board of directors are disqualified or are unable to act by reason of a deadlock on the board or otherwise (otherwise being the absence of a board)” and “ratify or confirm an action taken by the board of directors”.

Thus, the letter by the Bank to the Minister of Finance seeking approval for the loan was not out of place. The June 6, 2016 letter of the Bank stated that the letter was written to shareholders with significant shareholding to approve the credit facility. In addition, the shareholders by a written resolution may approve the transaction of McDan in accordance with Section 174 of Act 179.

Whether or not the transaction was Ultra Vires.

The regulations of the company set out the powers within which the officers and members of the company are to act. Ultra vires transactions are of two kinds:

1. An act beyond the objects and powers of the company itself;
2. An act beyond the powers of the officers of the company.

In Luguterah v Northern Engineering [1978] GLR 477 the court made a distinction between an act which is ultra vires by the company and an act which is ultra vires the directors. It held that members cannot ratify an act by the company which is ultra vires.

In this instance, a credit transaction involving the Bank and McDan, the credit transaction cannot be said to be ultra vires the company because the objects of a bank include lending money to its customers.

Whether or Not McDan is Liable for a Breach in the Internal Regulations of the Bank.

The effect of subscription to the regulations of a company according to Section 21(1) of Act 179 is that it serves as a “contract under seal between the company and its members and officers and between the members and officers themselves whereby they agree to observe and perform the provisions of the Regulations, as altered from time to time, in so far as they relate to the company, the members or the officers”. Thus, all acts of shareholders, directors and other officers of the company must conform with the company’s regulations.

The powers exercised by the directors although ultra vires may bind the company where third parties transact with the company in good faith and had no knowledge of the limitations of the directors as prescribed by the regulations. This is known as The Rule in Turquand’s Case.

 The rule was given statutory backing in Section 139 of Act 179. In Barclays Bank v Perseverance Transport [1961] GLR 665 the defendant contended that it was not liable to pay for the loan borrowed from the Plaintiff because the borrowing was ultra vires the company and the loan irrecoverable as there was no evidence that it was sanctioned by a general meeting of the shareholders in compliance with the regulations. The court held that the bank did not have to go behind that resolution to investigate the internal workings of the company and to check up whether a general meeting was held or not. See also the case of Boohene v National Savings & Credit Bank [1992] 1 GLR 175.

In Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246 the court discussed the issue of an ultra vires transaction in detail. It held that, simply because a transaction is entered into for an improper purpose does not make it ultra vires. There’s a distinction between an act which is entered into for an improper purpose (which is not beyond the capacity of a company, or void) and an act which is wholly outside a company’s objects (and hence ultra vires and void). An act which was ultra vires the company was void and a nullity, irrespective of the notice of the third party, whereas an act done in excess or abuse of the company’s powers was unenforceable only if the third party had notice of this fact. Further, an ultra vires act could not be ratified by the shareholders, whereas an act done in excess or abuse of powers could be. 

In my view, McDan is not in a position to know about the internal management of the Bank in granting credit facilities to its customers. It is my considered opinion based on the authorities aforesaid, that the issues raised by the minority are not issues which breach the corporate governance rules under the Companies Act 1963.