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Duties Of Nominee Directors faced with fraud

Published On: 1 October 2015

The Privy Council's decision in Central Bank of Ecuador and IAMF v Conticorp SA and others illustrates the importance of ensuring that offshore companies managed by nominee directors are run properly as separate, independent legal entities. It found the defendants guilty of dishonestly assisting and procuring the "nominee director" to act in breach of his fiduciary duties, who acted at all times on the instructions of the other defendants.  

Facts

The "nominee director", Mr Taylor, was appointed as the sole director and investment adviser of IAMF, on its face an independent investment fund company incorporated in the Bahamas. However, far from being independent, IAMF was heavily connected via common shareholders and through its investments with a group of companies ("the Group") which included a private bank in Ecuador, BCO Curacao ("the Bank"). IAMF did not hold a diverse book of investments; on the contrary, its investments were channelled into companies within the Group. Both IAMF and the Bank were controlled by members of the Ortega family.

In 1995/96 Ecuadorian banks came under extreme financial pressure and the Bank was in effect bailed out by the Central Bank of Ecuador, which extended loans in excess of $160 million. IAMF, over the course of three transactions, transferred its sole assets of tangible value, namely, cash, shares and customer deposits of the Bank’s, to Conticorp, a company within the Group in exchange for Global Depositary Receipts ("GDRs") and shares in Conticorp, the value of which was dependent on the financial position of the Group and its main operating company, the Bank.  Neither the GDR’s or the shares had real value due to the financial position of the Bank.

The Central Bank of Ecuador took over the Group and joined IAMF and members of the Ortega family as defendants in claims to recover the assets transferred by IAMF in the three GDR and share transactions. Mr Taylor was sued for breaches of fiduciary duty in failing to have regard to the interests of IAMF when entering into the three transactions. The other defendants were alleged to have dishonestly assisted and procured Mr Taylor in his breaches of trust and fiduciary duties.

Mr Taylor, as the nominee director, was paid only some $2,500 a year and, as is normal with such directorships, he acted, without question, on the instructions of the company's shareholders who were also shareholders and directors of the Group. 

His defence was that he had no reason to believe that the instructions he received were dishonest, and it was impossible, based on information available to him, to conclude where the interests of IAMF lay in relation to the three transactions, because it was not possible for him to determine the value of the GDRs and Group shares at the time of the transactions. 

In turn, the defendants, comprising individual shareholders and directors in the Group, defended allegations that they dishonestly assisted Mr Taylor in his breach of fiduciary duties on various grounds, including an argument that if the finding of dishonesty against Mr Taylor failed, they could not be guilty of dishonest assistance. 

The Privy Council held

  1. Mr Taylor was in breach of fiduciary duty to IAMF because he failed to exercise any independent judgement. Specifically, he could not rely in his defence on his small annual fee of $2,500, the distractions of being nominee director for numerous companies, the difficulty in valuing the Group's GDRs or shares, or the fact that there were no grounds for him to conclude the instructions given to him were dishonest when he made no reasonable enquiry;
  2. The defendants were held jointly and severally liable for US$191m for dishonestly procuring and assisting Mr Taylor in his breaches of fiduciary duty. 

Comment

The law relating to nominee directors' duties is broadly speaking the same in the UK as it is in the Bahamas. As Lord Mance put it, "A nominee director is not entitled to forego, or surrender to another, any exercise of his discretion, however paltry the amount he may be paid." The fact that he may lack any information or resources to be able to do any more, does not absolve him of the duties to understand the company's affairs and to apply his own mind to whether a particular transaction was in the company's interests. In short, a nominee director is in no different a position to a normal director when it comes to the exercise of this duties.

Many global corporate groups make use of off-shore holding companies and appoint board members to ensure that holding company act in the interests of the group. Such nominee directors must deal with the tension that can arise between the interests of the group, its parent company and the holding company. The Privy Council's decision emphasises the importance of ensuring that such offshore companies are run properly as separate, independent legal entities. A parent company and its shareholders/directors which expect a nominee director of a subsidiary company to simply act on instructions, without any regard to the interests of the subsidiary entity, risk personal liability on the basis it/they have assisted and procured breaches of duties.

As a concluding remark, any cases involving allegations of fraud face a high hurdle in proving fraud in evidential terms. By the time the case came before the Privy Council, the allegations were, as acknowledged by the Privy Council, significantly simplified. The facts set out in the Privy Council's judgment, although complex, point inevitably towards a dishonest intention to defraud IAMF by securing the transfer of IAMF’s assets in return for GDRs and shares of little or no value. Thus described, the conclusion of the Privy Council is hardly surprising. What this case does illustrate is that what may be an obvious case of fraud to one court, may turn into a labyrinth of confused motive, knowledge and intention in the hands of another court. It took until the appeal before the Privy Council to get what, on the face of it, appears to be the obviously correct decision, but no case involving allegations of fraud is straightforward to bring to trial.

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