Opinion: Collapse of banks in Ghana, can directors be held responsible?
Without warning, the country has been thrown into deep discussions about the collapse of UT Bank and Capital Bank. We are told that quite a few other banks may join the wagon.
UT Bank was listed on the Ghana Stock Exchange (GSE) until the crisis broke. GCB Bank, itself a listed company on the GSE, has with the approval of the central bank taken over “all deposits and selected assets” of the two former banks under a Purchase and Assumption transaction.
Questions regarding the role of the advisory council of the GSE if any, the input and fate of the shareholders involved, how to handle the political interests in the whole caboodle, whether the regulator was alive to its role among others continue to titillate the minds of analysts.
That said, what could happen to the directors and officers of the collapsed banks seems to be of deep interest to many perhaps for reasons borne out of sheer curiosity, love or hatred for some of the names on that list or simply for some elliptical purposes.
The applicable laws
The Banks and Specialised Deposit Taking Institutions Act, 2016 (Act 930) has amended and consolidated the laws affecting banks and deposit-taking entities in Ghana. The Act does not apply to credit unions because they are “subject to licencing and regulation under the Non-Bank Financial Institutions Act, 2008 (Act 774)”.
Section 2 of Act 930 says that it is “to be read together with the Companies Act, 1963 (Act 179) and shall not except as otherwise provided in this Act derogate from the provisions of that Act”. The Act further states that it shall prevail in case of a conflict with the Companies Act, giving vent to the age-old Latin maxim of interpretation known as generalia specialibus non derogant (the provisions of a general statute must yield to those of a special one).
Again, the Act provides in its section 157 that despite its repeal of the Banking Act, 2004 (Act 673) and the Banking (Amendment) Act, 2007 (Act 738), “the regulations, orders, directives, notifications, instructions, exemptions, approvals, decisions, rules and any other executive or administrative act lawfully made, given or done under Act 673 and Act 738 shall, upon the coming into force of this Act, continue in force until amended, reviewed, terminated or revoked in accordance with this Act”.
The Act makes the Bank of Ghana the regulator of the industry and gives it a raft of powers including intervention in appointments, disqualification of directors and key management personnel, imposition of penalties for non-compliance, review of applications for sale as well as mergers and acquisitions etc.
The Board of Directors
In Ghana, the directors of a bank like any other incorporated company “are appointed to direct and administer the business of the company”. They also stand in a fiduciary relationship to the company as a whole, which means that Ghana asserts the stakeholder primacy rule over the shareholder variant.
It is the directors who must “prepare and send to every member of the company and to every holder of debentures of the company a copy each of” the financial statements, including a report by the auditors as well as their own report “on the state of affairs of the company”.
Companies act through their board of directors, shareholders in general meeting and/or authorized officers and agents (or persons who have been put in a positions that make their actions imputable to the company in question) but it is the directors who carry the ultimate oversight responsibility.
Thus Ghanaian law requires directors to be “faithful, diligent, careful and ordinarily skilful” in all their actions. They are to act within the powers given them by law, by the regulations of the company or by the resolution of the shareholders as the case may be.
Their fiduciary duties are mainly split into two: the duty of care and the duty of loyalty. A third duty, the duty of obedience, has not gained much traction in corporate governance analysis.
The duty of care is considered to be the lower bar of the two main duties. It is based on the assumption that directors must not be strapped into risk-averse fetters as they oversee the management decisions and ventures of the firm. That way the best minds would be attracted onto the boards of businesses. Thus once the directors act in good faith and exercise their duty to monitor, they may be indemnified even under the cover of insurance at varying levels depending on the jurisdiction in question. Critically, even in a lawsuit they may get the benefit of what is commonly known in the United States as the Business Judgment Rule (BJR). This protects directors against second-guessing and in some instances they get away with “cease and desist” warnings.
The duty of loyalty is the higher bar. It stretches to cover deals in which directors may have personal financial interests, undisclosed or hidden benefits in deals (self-dealing transactions), compete against the interest of the firm, unfairly whisk corporate opportunities away from the company for personal gain, do not get the approval of disinterested board members, fail to make full-disclosure etc.
While some jurisdictions have created safe-harbour statutes for directors and some have even gone as far as permitting directors to “fiduciary-out” by statute or agreement, section 203(4) of Ghana’s Companies Act does not permit the regulations or a contract to relieve a director of liabilities incurred in breach of her duties.
It must be stated however, that unless prevented by the said provision, a director may by full disclosure of her interest cure a conflict of interest and gain the consent of the company prior to a particular act or by ratification.
Directors may also be made to compensate a company for loss it suffers for a breach of duty and account for profit it made as in a typical principal-agent relationship. They may also be subjected to fines imposed by the court or even prevented from serving on the boards of other companies. Since companies may also be held criminally liable, this may extend to directors who are proven to have participated in criminal activity.
The Bank of Ghana is reported to have indicated that it would investigate the two banks to see whether or not their directors (and possibly officers) should be held liable for the collapse of the banks.
If all the directors exercised their duties of care and loyalty as they ought to and yet their best efforts led to the collapse of the banks, they may get the benefit of the business judgment rule. Some may even argue that the government should probably have bailed them out as happened in the West during the financial crisis.
If on the other hand they were passive, refused to act in good faith, ignored red flags, were not loyal, were not entirely fair, took corporate opportunities away from the banks for their personal gain and did not disclose their conflicted transactions to the company then one cannot help but wonder if the regulator would be willing apply the whip and perhaps also pursue prosecution.
In 2016, two former bank board members of a failed bank in Chicago were sentenced to 5 years in prison “for defrauding” a bail out programme by the federal government. Years earlier, a former chief financial officer was jailed and made to refund millions of dollars for creating partnerships with others “while enriching themselves” in the Enron scandal. Again, 63 year old Bernard Ebbers, the co-founder, former chairman and chief executive officer (CEO) of WorldCom was sentenced to 25 years in prison in “the largest accounting fraud in history” for his part in the intentional misclassification of $11 billion in expenses as capital investments.
We neither have the full facts to predict the outcome of the regulator’s investigations nor can we even draw parallels with the examples of corporate scandals around the world. We can only wait with bated breath!
The writer, Robert Nii Arday Clegg is a corporate law, finance and governance practitioner with Nii Arday Clegg & Co., a corporate law firm.