The Concept Of Seperate Legal Entity Law Company Business Partnership Essay

Published Date: 02 Nov 2017

PREFACE

Working in the offshore sector especially being part of the regulator of an offshore jurisdiction, I have noticed that the use of nominee director is on the increase. The subject is a fascinating one because although nominee directors are being used there are so many complexities surrounding it. Trying to decipher these complexities is indeed a challenge. This paper has been written in order to try and shed some light on the complexities surrounding the use of nominee directors and the risk associated with it.

Special thanks to my family especially my mum for their continuous support. To Randolph and Marlon thank you for keeping me company during the night.

ABSTRACT

Nominee directors are a fact of commercial life and cannot be ignored [1] . However until a definite status of nominee directors are recognised, individuals who agree to act as nominee directors will continue to face the dilemma as to whose interest they should regard. A person appointed as nominee director should ensure that there is a solid indemnity agreement between himself and the appointer in order to ensure that he is not denied protection under relevant statute [2] . Furthermore, there should be provisions in the law which requires nominee directors to identify themselves and the person that has appointed them and this information should be publicly by ensuring that it is recorded in corporate registries [3] . This is important in order to prevent the use of illegal activities which are hidden behind the use of nominee directors.

INTRODUCTION

There is quite an extensive literature debate about the role and duties of nominee directors. [4] Several case law surrounding this issue, have appeared before the Court mostly in Australia and have been used as precedent in other countries in order to shed light on the complexity of the subject. [5] The main issue with nominee directors relates to the fiduciary duties of directors and how this impacts on the role of nominee directors [6] .

As established in the Solomon case, a company is a separate legal entity, independent from its shareholders and directors [7] . Whilst shareholders are the ones who own a company, directors are the ones who manage it and as a result have a fiduciary duty to put the interest of the company first and foremost above any other interest [8] . Theoretically, this is far easier said than done. How can a nominee director who has been appointed by either a shareholder or creditor act in the best interest of the company first and at the same time honouring his duty to act in the best interest of his appointor?

Whilst the use of nominee directors are legal in many countries, the fact that there is still loopholes regarding its definition and its role, creates a good opportunity for those intending to get away from the legal system. This is done by hiding behind the concept of nominee directors. One such example is in offshore jurisdictions whereby this mechanism is being used to hide the names of corrupt individuals, tax evaders and criminals who are moving their assets around anonymously [9] .

The difficulty faced in understanding the role and duties of nominee directors is the need to understand the reason as to why nominee directors are appointed. Once this has been clearly established, a proper legal definition of the term needs to be appointed and decision has to be taken as to whether nominee directors are bound by the same fiduciary duties as ordinary directors. This will be crucial in order to restrict the abuse of the use of nominee directors. Furthermore, nominee directors should declare who they are representing and for what purpose and this information should be recorded and be made available for inspection [10] . It is only with these provisions in place that the court can strike a balance between the principles of nominee directors and regulating their abuse. Such a balance will be of the utmost importance for the future use of nominee directors.

SECTION ONE

ESTABLISHING THE CONCEPT OF SEPERATE LEGAL ENTITY

There have been significant developments to the company law that we know today, these developments have come as a result of the needs of the emergent business world and the need for the court to regulate these needs. Before trying to understand and be in par with these developments it is important to understand the origin of company law. The roots of company law, as it is often describes, originates from the famous English case Salomon v Salomon [11] . The case is vital to the establishment of separate legal personality which is the core of company law [12] .

Mr. Salomon was a leather and boot merchant. The business was successful and in 1892 he decided to open a limited company; Salomon &Co. Ltd. His sons and wives were the shareholders, including himself also as the managing Director. The company purchased the business for the sum of £39,000. The price was satisfied by £10,000 in debentures, creating a charge over all the company’s assets. Mr. Salomon hold 20,001 shares and the remaining six shares were distributed amongst his sons and wife. However, soon after there was a decline in business and the company became insolvent. The assets were sufficient to discharge the debentures but there was nothing for the unsecured creditors [13] .

The Court of Appeal upheld the argument that the company was a sham contrary to the Companies Act 1862 [14] . The House of Lords however rejected this argument. They argued that the company had seven shareholders as was required by the Act and that the Act did not make any provision for the level of involvement of the shareholders neither was it prohibited to form a company in order to carry on business in the name of the company [15] . Lord Macnaghten stated [16] ;

"The company is at law a different person altogether from the subscribers … and

though it may be that after incorporation the business is precisely the same as it was

before, and the same persons are managers, and the same hands receive the profits, the

company is not in law the agent of the subscribers or trustee for them. Nor are the

subscribers, as members, liable in any shape or form, except to the extent and

manner provided in the Act."

The decision of the House of Lords established the legality of the company and established the complete separation of the company and independence from the person who formed, who invest money in it and who directs and manages its operations. It is this decision that formed the basis of the modern corporate law [17] . The principle of separate legal entity has received collective support amongst scholars and judicial reviews. Importantly, the principle is encoded in the Companies Act. Both the English and Australian Courts have upheld the Salomon principle, illustrating that the principle of separate legal entity has never been doubted [18] .

DIRECTORS AND SHAREHOLDERS – THEIR ROLES AND DUTIES

As established in the Solomon case and integrated in the legislations, shareholders are owners of a company. The number of shareholders within a company depends on the type of business structure as well as the size of the company. The role of shareholders is significant in financing the operation and governance of the company [19] . They are also the ones who have the powers to appoint directors and senior officers of the company [20] . Shareholders can act in their own interest regardless of the interest of other shareholders

On the other hand, directors are required legally to act in the best interest of the company that is in the interest of all shareholders and not just a group. The board of directors is responsible for appointing officers who are given management powers [21] . The role of these officers is to act as agent of the company. The Articles of Association as well as other written regulations provides the directives for the management of business and regulate the affairs of the company by providing the procedures that governs shareholders as well as providing directives on access to company information and the procedures for meetings [22] .

The directors’ duty is rooted in the principle of good faith, which is a requirement of the common law as well as other statutes which establishes the boundaries of this duty [23] . This basically interprets to the fact that directors have an obligation to act in the best interest of the company meaning that duty is owed to all shareholders and not individual ones. Usually this is not difficult to interpret given that most of the time what is good for the company will also be beneficial to the shareholders [24] . Similarly maximizing the return of shareholders will be beneficial for the company. However there may be occasions where the interest of the company and interest of shareholders differentiate. For example it may occur that the common interest of the shareholders may be in realizing a short term gain for their investment which the directors may view as not necessarily being in the long-term best interest of the company [25] . Furthermore, the interest of majority shareholders may differ to that of minority shareholders and vice versa and both may not necessarily be in the interest of the company. Such situation depends on the facts involved and also the proper directives governing the decision making of the directors [26] . Traditionally, the term "in the best interest of the company" used to refer to shareholders only, however recently some courts have extended the definition of the "best interest of the company" to include also interest of other persons having a significance in the company’s business such as the creditors [27] . It is apparent that more and more individuals having an interest in the company’s affair are requesting that their interest is also regarded. One such example are financial institutions who as part of the loan facilities agreement to companies requesting for loans from them have imposed the appointment of directors to the board of directors of the company in order to safeguard their interest [28] .

Directors therefore needs to understand and remember that their duty and decisions have an impact not only on the company and its shareholders but goes beyond that to include the community as a whole [29] . For example a decision to close a factory may have impact not only on the company and shareholders but also on the employees, their families and community as a whole. High risk business strategies or corporate re-structuring may have an impact on debenture holders of a company [30] . A country’s economy may be affected by decision to move the business offshore. Directors are therefore under immense pressure to ensure that decisions taken are in the interest of every stakeholder.

Furthermore, directors may incur personal liability for their actions and decisions during the course of their duties. The list is too long to discuss the areas where directors can be held liable. However, directors should take into account the provisions of Company’s Directors’ Disqualification Act 1986 which could result in the disqualification of a director from a period of two to fifteen years [31] . Additionally, directors should also bear in mind the provisions of the Insolvency Act 1986 which may lead directors to be personally liable for company’s debts, and health and safety issues [32] 

DIRECTORS DUTIES AS SET OUT IN THE COMPANIES ACT 2006

In the United Kingdom, the Companies Act 2006 outlines seven general duties to which Directors must abide to. These duties are classified into sections and are as follows [33] ;

Section 170 – Scope and nature of general duties

This section explains the general duties of the directors. It places much emphasis on the fact that the duties set out are owed by the directors to the company and should serve the interest of the company.

Section 171 – Duty to act within powers

Directors must respect and act in accordance with the company’s constitution and exercise their powers for a proper purpose. The powers constituted to them must only be used for the benefit of the company.

Section 172 – Duty to promote the success of the company

Every Director has a duty to act in good faith for the benefit of the company. Whilst directors have the power to make decisions on behalf of the company they must ensure that decisions taken are in the benefit of the company and must calculate and take into consideration the consequence of their decision prior to taking it.

Section 173 – Duty to exercise independent judgment

Directors must ensure that the decisions taken are independent and should not be influence in any way.

Section 174 – Duty of skill, care and diligence

Directors must act in accordance with the skills, care and knowledge which any person in its capacity is expected to have.

Section 175 – Duty to avoid conflict of interest

In line with section 173, director must ensure that any decisions taken are in the best interest of the company and should not let individual interest influence their decision making.

Section 176 – Duty not to accept benefit from third parties

A director must ensure that benefits in any form from third parties should not be accepted as this can lead to conflict of interest.

Section 177 – Duty to declare interest in a proposed transaction or arrangements

Any interest that a director may have in other businesses or companies especially competitors should be declared.

One of the vital responsibilities of directors with regards to the duties set out in the Companies Act is the preparation of accounting information [34] . Directors are fully responsible for ensuring that companies maintain full and accurate accounting records. These include preparations of balance sheet and profit and loss account [35] . These information needs to be presented to shareholders.

The statutory duties as outlined above does not necessarily replaces the previous fiduciary duties, rather they are interpreted in accordance with previous case law which still remains relevant. These statutory duties cannot be looked at in isolation given that in addition to these duties, directors are still bound to other duties under other legislations and regulations.

SECTION TWO

NOMINEE DIRECTOR – DEFINITION AND USE

In the continuously developing business world, it is becoming customary for shareholders and creditors to appoint individuals which will represent them on the board of Directors [36] . Reasons for these appointment vary from confidentiality purposes to time consumptions. It is therefore no wonder that the concept of nominee directors is becoming a popular one in today’s business world. Unfortunately whilst the use of the term is on the increase, there is yet to be a clear definition as to what exactly the term means [37] . Surprisingly, even the court has yet to establish a clear definition of the term [38] even if already several cases have appeared before the court involving the use of nominee directors.

Generally, there has not been many written publication on the define duties and role of nominee director. What can be deducted from literature available, is that they all seems to refer around one global definition which is the appointment of a person who acts on behalf of an individual and on directives given by the individual in order to protect his interest [39] . This appointment is done through some form of agreement or understanding. The agreement may be prescribed in the Articles of Association of the company or shareholders agreement or simply just a "mere understanding" of some sort [40] .

In the article "The Role of Nominee Director" [41] the term is described as being fairly new and has become to light recently mostly because of certain conditions which financial institutions have imposed on companies who have approached them for loan facilities [42] . One of these conditions is the appointment of a representative of the financial institution to the board of directors of the companies [43] . The nominee director of these financial institutions may be their employees or a group of professional from sectors in which the financial institutions have an interest in [44] .

CATEGORIES OF NOMINEE DIRECTORS AND THEIR USE IN DIFFERENT TYPES OF COMPANIES

In practice there seems to exist several categories of nominee directors, however the two main categories seems to be representative and independent nominee directors [45] .

As the term suggests, representative nominee directors, represents the appointor by acting as an advocate and protector of the appointers’ interest. The nominee is usually an employee or lawyers or representative of special groups. They are regarded as the spokesperson of the appointor [46] .

Similarly to representatives, independent nominee directors are expected to act in the interest of the appointor. Importantly they need to keep the appointor informed on issues of interest, this is especially important in the case where the nominee director is representing a creditor [47] . However, independent nominees differ from representatives in the level of independence they have from the appointor. In order to better understand the comparison between the two let us look at the roles of the nominees in the different types of companies where they are directors [48] .

LISTED PUBLIC COMPANIES

In such companies the appointor is often a major shareholder with substantial powers in the decision making of the companies. In such cases the terms of appointment of nominees may be in the form of an agreement from the board of directors in recognition of powers held by the shareholder or it may be prescribed for in the Articles of Association [49] . The role of the nominee in such cases will most often be representative although additional nominees may be appointed who will be independent. [50] 

LISTED SUBSIDIAIRY AND ASSOCIATED COMPANIES

In these types of companies there will usually be a mixture of representative nominee directors and independent nominee directors [51] . The representative nominees may be senior managers of the company and independent nominee directors will be those appointed to represent the minority shareholders [52] . The independent directors will possess a certain level of independence rather than acting strictly on directives provided by the minority shareholders, whereas the representative are obliged to act on every directives provided by their appointor.

WHOLLY OWNED SUBSIDIAIRIES

Within these types of companies the board of directors will mostly constitute of representative directors. Non-executive independent nominee directors are often appointed to provide alternative business ideas to the company. One such example is Australian wholly owned subsidiaries of overseas corporations [53] .

JOINT VENTURE COMPANIES

A joint venture company is the adoption of the corporate form of the pursuit by a small number of parties which is made of usually two or three common business enterprises [54] . The company will be bound by its constitution or shareholders agreement to a single enterprise [55] . In these types of companies appointment of directors are made on the means by which that party protects its own interest [56] . As a result, mostly representative nominee directors are appointed and their main role is to act as spokesperson and to carry out the duties in the sole interest of their appointor [57] .

The above examples illustrate the role played by nominee directors and the reasons why they are appointed. It is of course impossible to know the precise reason and the particular interest to which the nominees are appointed, given that there is no legal requirement to register the appointment nor to provide any notifications or explanations with regards to the terms of understanding between the nominee and the appointor [58] .

In order to better understand the duties of nominee directors we need to look at the general duties of directors and how they are applicable to nominee directors. Two of these categories which we will be focusing on, will be the fiduciary obligations of good faith towards the company and the duties of care and skills. The issue surrounding the appointment of nominee directors focuses around the fiduciary obligation of good faith which is the area which we will focus on.

THE DUTIES OF DIRECTORS AS APPLICABLE TO NOMINEE DIRECTORS – DUTY OF GOOD FAITH

The legal system in the United Kingdom places several obligations of good faith on company directors [59] . These obligations has its history from decisions taken by the English courts in the second half of the nineteenth century after legislations during that time allowed for trading companies to be incorporated with limited liability for their members [60] . The legislation framework therefore gave the court the task of developing standards for those who were managing the affairs of the company. In developing these standards the court looked at the standards that were in place for trustees. However, over time it was determined that the role of trustees and directors were different. In the end the court treated directors as fiduciaries towards their companies [61] .

As a result one of the duties imposed on directors is the duty to act for the benefit of the company as a whole or what is sometimes referred to as the duty of good faith [62] . This duty imposed on the directors the responsibility and obligations to act in the interest of the company. What is interesting to note is that given that the company is not a physical person, how can one interpret what is the "interest of the company"? How does the law define or interpret the "interests of the company"? The answers to these questions came to light in an English case which has been cited by the Australian court many times.

Greenholgh v Arden.NB V e Cinemas Ltd [63] 

Evershed M.R said [64] ;

"In the first place, I think it is now plain that ‘bona fide for the benefit of the company as a whole’ means not two things but one thing. It means that the [director] must proceed upon what in his honest opinion is for the benefit of the company as a whole. The second thing is that the phrase ‘the company as a whole’ does not mean the company as a commercial entity, distinct from the corporators. It means the corporators as a general body. That is to say that the case may be taken of an individual hypothetical member and it may be asked whether what is proposed is in the honest opinion of those who voted in its favour for that person’s benefit."

As a result should a director be acting solely in the benefit of single shareholder, even if it is one who holds the majority voting rights, the director will be in breach of duty as was established in Ngurli Ltd v McCann [65] .

The interest of the company refers to the fact the directors need to consult the interest of all shareholders and not merely a specific group [66] . In other words it means that the directors must act impartially and in the collective interest of the shareholders [67] . Failure to do so will result in breach of duties. Recently, the court has even extended the interpretation of duty of good faith to include not only the interest of the shareholders but interest of the creditors also [68] . For example in the decision taken by the High Court of Australia in Walker v Wimborne [69] , Mason J. stated [70] ;

"[I]t should be emphasized that the directors of a company discharging their duty to the company must take into account the interest of its shareholders and its creditors. Any failure by the directors to take into account the interest of the creditors will have adverse consequences for the company as well as for them. The creditor of a company must look to that company for payment. His interest may be prejudiced by the movement of funds between companies in the event that the companies become insolvent".

The same viewpoint was also expressed in Kinsela v Russell Pty Ltd [71] and Winkworth v Edward Baron Development Co.Ltd [72] .

DUTY TO AVOID CONFLICT OF INTEREST

Another aspect of directors’ fiduciary obligation is the duty to avoid conflict between his personal interest and other interest which the director is bound to protect and his duty of loyalty to the company, it also means that the director needs to avoid commitments or situations which can create the possibility of conflict [73] . This then raises the issue of the role of nominee director. If we are to refer back to the definition provided early on regarding what is a nominee director there clearly is a breach of duty with regards to the role of nominee director and the duty to act in good faith.

The obligation of Directors to avoid conflict of interest requires the director to avoid situations which raises the possibility of conflict. This obligation has been described as "prophylactic" [74] as it requires the directors to "shun the occasion of temptation and not merely to resist its thrall" [75] .

The conflict of avoidance of obligation relies upon the fact that it is "neither wise nor practicable" for the law to look for a criteria beyond the fact that duty has been opposed to self interest [76] . The conflict avoidance of obligation reflects the ancient saying that "it is impossible to honour dual loyalties" [77] . Similarly same can be echoed in the bible by the Evangelist Luke who states that "No servant can be the slave of two masters; he will either hate the first and love the second or treat the first with respect and the second with scorn" [78] .

The conflict avoidance obligations have several applications in relations to company directors. For example a director cannot enter into contract with his company given that the terms of contract may lead to his duty as a director being compromised and resulting in conflict of interest should he be receiving personal benefits under the contract [79] . Similarly a director is excluded from using valuable information or opportunities acquired during the course of his duty as director [80] . Pursuing such opportunities would raise a conflict between the director’s duty to exploit the opportunity to the company’s advantage and the directors’ personal interest for his personal gain [81] . However should there be a need for a director to enter into contract with the company, specific clauses are entered in the Articles of Association which allows for the director to do so, however subject to particular clause for example exclusion from voting on the contract [82] .

SECTION THREE

JUDICIAL IMPLICATIONS

AUSTRALIAN CASE LAW ON NOMINEE DIRECTOR AND DUTY OF GOOD FAITH

In the 1960’s two judgements were made which looked at the practice of appointing nominee director and relaxed the duties of good faith applying to them.

Levin v Clark [83] 

In this case, the plaintiff Levin bought the majority shares in a proprietary company. He then mortgaged the shares to the vendor to secure the future payments of the purchase price. Prior to the sale, the articles of association of the company named Clark and Rappaport as governing directors and conferred extensive powers upon them. When the sale took place, the articles were to be amended to make the powers of Clark and Rappaport exercisable only in the event of Levin’s default under the mortgage agreement. The articles and the mortgage agreement did not expressly identify Clark and Rappaport as nominees and did not provide for any special duties for them except that they were suspended as the governing directors and would only resume to that position upon Levin’s default under the mortgage.

The mortgagee gave notice of Levin’s default and Clark and Rappaport revert to being governing directors. Levin challenged their appointment and their exercised power by arguing that as governing directors their primary interest was to the mortgagee and not the company as a whole. In addition, Levin argued that some of the resolutions which Clark and Rappaport had passed were invalid because they had acted in the sole interest of the mortgagee. The case went to the Supreme court of New South Wales where Jacobs J made the following arguments [84] ;

I consider that Clark and Rappaport did act primarily in the interests of the mortgagee once they resumed the exercise of their powers as governing directors. However, I consider that it was permissible for them so to act. It is of course correct to state as a general principle that directors must act in the interest of the company ... However, that leaves open the question in each case - what is the interest of the company? It is not uncommon for a director to be appointed to a board of directors in order to represent an interest outside the company – a mortgagee or other trader or a particular shareholder. It may be in the interest of the company that there upon its board of directors one who will represent these other interests and who will be acting solely in the interests of such a third party and who may in that way be properly regarded as acting in the interest of the company as a whole. To argue that a director particularly appointed for the purpose of representing the interests of a third party cannot lawfully act solely in the interests of that third party, is in my view to apply the broad principle governing the fiduciary duty of directors, to a particular situation, where the breadth of the fiduciary has been narrowed, by agreement amongst the body of shareholders. The fiduciary duties of directors spring from the general principles, developed in courts of equity, governing the duties of all fiduciaries – agents, trustees, directors, liquidators and others- and it must be always borne in mind that in such situations the extent and degree of the fiduciary duty depends not only on the particular relationships, but also on the instrument governing the exercise by the fiduciary of his powers and duties and the wishes, expressed directly or indirectly, by direction, request, assent or waiver, of all those to whom the fiduciary duty is owed.

The decision taken by Jacobs J made reference to "particular circumstances" and the "extent and degree of fiduciary duty" [85] . Most importantly it referred to the "terms of the instrument" which governed the extent of the fiduciary powers [86] . In this case the instrument was the articles of association which named Clark and Rappaport as governing directors’ and the authority to exercise their powers should Levin are in default [87] . Despite the fact that the articles did not explicitly name them as nominees, it is clear that their role was to protect the mortgagee in the event of default [88] .

The case signified the importance of a company’s instrument which may directly or indirectly dictate the duties of nominee directors which even if it main role is to protect the interest of their appointor; this interest can also be interpreted as the interest of the company as a whole [89] .

What happens in the event where the instrument of the company does not cater for "particular circumstances" of the fiduciary duties?

Re broadcasting station 2GB Pty Ltd [90] .

In this case it was alleged that the new controller of 2GB, Fairfax, had appointed directors to 2GB’s board who were nominees of Fairfax and were acting for all intents and purposes for Fairfax only. It was argued that the articles of association did not provide for the appointment of nominee directors. Jacobs J. Stated [91] ;

I am satisfied that these additional directors were, to all intents and purposes,

the nominee of the Fairfax companies would be likely to act and who would

be expected by the Fairfax interests to act in accordance with the latter's

wishes. At this point I feel that a crucial stage in the analysis is reached. It is

my view that conduct of the kind which I have related is not reprehensible

unless it can also be inferred that the directors, so nominated, would so act

even if they were of the view that their acts were not in the best interests of

the company. This is not a conclusion which can likely be reached and I see

no evidence in the case upon which I can reach that conclusion. It may well

be, and I am inclined to regard it as the fact, that the newly appointed directors

were prepared to accept the position that they would follow the wishes of the

Fairfax interests without a close personal analysis of the issues ... but I see no

evidence of a lack in them of a bona fide belief that the interests of the Fairfax

company were identical with the interests of the company as a whole. I realise

that, upon this approach, I deny any right in the company as a whole to have

each director approach each company problem with a completely open mind,

but I think that to require this of each director of a company is to ignore the

realities of company organisation. Also, such a requirement would, in effect,

make the position of a nominee or representative director an impossibility.

PROBLEMS RAISED BY NOMINEE DIRECTOR

Nominee directors occupy a delicate position given that under the UK and Australian laws the board of directors are to be made up of a collective group of people working in the best interest of the company and not for individuals with their own interest [92] . The nominees’ agreement with his appointor therefore leads to a breach of directors’ duty as it avails to conflict of interest [93] . Whilst the law does not imply that the appointments of nominees are necessarily unlawful it is silent with regards to conflict of loyalties which makes it difficult to find remedies for these situations [94] .

REPORTING TO THE APPOINTOR

Based on the agreement between an appointor and a nominee, the nominee director will most often be expected to report to the appointor the state of the company’s affair. There are two issues regarding this; are the nominees rights of access to corporate information qualified by reason of his nominee status and secondly are there any restrictions on the nominee to disclose to his appointor information which he has acquired in his capacity as a director [95] .

Generally according to the common law principle, directors are entitled to have access to all corporate documents [96] . As stated in Edman v Ross; [97] 

The right to inspect and if necessary to take copies of [corporate documents] is essential to the proper performance of a director’s duty, and, though I am not prepared to say that the court might not restrain him in the exercise of this right if satisfied affirmatively that his intention was to abuse the confidence reposed in him and materially to injure the company, it is true nevertheless that its exercise is generally speaking not a matter of discretion with the court and that he cannot be called upon to furnish his reasons before being allowed to exercise it. I the absence of clear proof to the contrary the court must assume that he will exercise it for the benefit of the company.

With regards to nominee directors, the case law supports the right of access. In Bennett’s [98] case, the nominee director admitted that it was his intention to communicate the advice obtained by the board to his Union to be used to the best advantage of the union in its dispute with the board [99] . It was ruled that the director had misused his position as a director and failed his duty to the board. The directors’ duty to avoid conflict of interest prevents him from using information acquired in the cause of his duty without the consent of his company [100] . This therefore places the nominee director in a difficult position when it comes to reporting to his appointor [101] . This issue goes back to the primary issue of how do a nominee director balance the company’s interest and the interest of his appointor.

LIABILITY OF NOMINEE DIRECTOR WHEN ACTING UPON THE KNOWLEDGE OF THE APPOINTOR

Company directors are personally liable should they breach their duties to the company. In cases where nominee director is appointed and is used as a form of "puppet" by the appointor to orchestrate their acts without taking into considerations the consequences involved, the question that needs to be asked is who is liable for the acts? Is it the nominee or the appointor? The decision was established in the English case Selangor United Rubber Estates Ltd v Cradock [102] .

Craddock made an offer for stock in a company whose only assets were holding funds in its bank account. Craddock offer of seventy nine percent of the stock was accepted and he appointed two individuals to be directors of the company. Cradock came up with a scheme and directed the two directors to use the company’s funds to provide a loan to an intermediary to fund the acquisition of the company stock for which Craddock had acceptances. Application of company fund to assist in the acquisition of its own stock was illegal. The directors were sued for misapplication of company funds. As per the decision in He Lands Allotment Co. [103] , directors who misapply company assets in their hands or under their control will be personally liable as though they had been trustees of that property or fund. The directors denied knowing that the company funds that were lent to the intermediary were in fact to be given to Craddock to fund his stock acquisition. It was held that where a director acts on direction of a third party (even if the party is the majority shareholder) the director is bound by the third party knowledge of the nature of the transaction. It was found therefore that the directors had acted under the directions of Craddock and although they were "puppets which had no movement apart from the strings manipulated by Craddock", they were still liable and had to replace the misapplied funds [104] .

OPRESSION

In the case of Scottish Co-operative wholesale society Ltd v Meyer [105] , the plaintiff formed a subsidiary to manufacture rayon and the respondents were appointed as joint managing directors. The respondents had 3900 shares and the society had 4000 and appointed three nominees to the board. The society tried to buy out the respondents but was not successful. As a result the Society came up with a policy and transferred the company’s business to a new department within its organisation. The three nominee directors assisted with the plan. The respondents applied for relief under the statutory oppression provision. In considering whether the transaction was conducted in an oppressive manner; Lord Denning made reference to the position of the nominee directors [106] :

So long as the interests of all concerned were in harmony, there was no

difficulty. The nominee directors could do their duty by both companies

without embarrassment. But, so soon as the interests of the two companies

were in conflict, the nominee directors were placed in an impossible position.

... it is plain that, in the circumstances, these three gentlemen could not do their

duty by both companies, and they did not do so. They put their duty to the

cooperative society above their duty to the textile company in this sense,

at least,that they did nothing to defend the interests of the textile company

against the conduct of the co-operative society. They probably thought that

'as nominees'of the co-operative society their first duty was to the co-operative

society. In this they were wrong. By subordinating the interests of the textile

company to those of the co-operative society, they conducted the affairs of the

textile company in the manner oppressive to the other shareholders.

His view was reiterated in Boulting v Association of Cinematograph Television and Allied Technicians [107] where he said [108] ;

or take a nominee director, that is a director of a company who is nominated

by a large shareholder to represent his interests. There is nothing wrong in it.

It is done every day. Nothing wrong, that is, so long as the director is left free

to exercise his best judgment in the interests of the company which he serves.

Lord Dennings approach in these cases have been described as " strict interpretation" given that he does not take into consideration the fact that "representational circumstances" affects the directors fiduciary duty to act in the interest of the company [109] .

OTHER JURISDICTIONS

In the UK the case law takes a more traditional view of the obligations of the nominee director. In Boulting v Association of Cinematography Television and Allied Technicians [110] Lord Denning gave the following explanation with regards to a nominee director [111] ;

that is a director of a company who is nominated by a large shareholder to represent his interest. There is nothing wrong in it. It is done everyday. Nothing wrong, that is, so long as the director is left free to exercise his best judgment in the interests of the company that he serves. But if he is put upon terms that he is bound to act in the affairs of the company in accordance with the directions of his patron it is beyond doubt unlawful.

The UK it seems, places great emphasis in highlighting the dangers of nominee directors. In the Guide to the boardroom Practice [112] , from the Institute of Directors (UK) it is argued that a director owes his duty of diligence and honesty to the company of which he is a director and he is obliged to act bona fide in the company’s interest [113] . If the fiduciary duty is owed to more than one, conflicts of interest will arise and it is for this reason that the Institute of Directors disapprove of appointment of nominee directors if their main motive of the appointer is simply to ensure that his own interests are preferred above others [114] .

In the past the court have tended to ignore the commercial reasons of appointment of nominee directors and applied the common law and statutory duties upon the directors without acknowledging that nominees have a duty towards their appointer. In Irish Press v Ingersoll Irish Publications Ltd [115] , the court acknowledges that whilst nominee directors have a duty to act in the interest of the company they also "act on the instructions of their nominating party" [116] . The court went on to say that "there is nothing wrong with appointing body or party having a view as to where the interests of the company lies and ensuring that its nominees follow that direction; provided that in doing so they are not seeking to damage anybody else’s interest in the company" [117] .

From a legal point of view, issues with nominee directors arise where the company’s interest becomes second to that of the interest of the appointor [118] . In the event that a nominee or his appointer attempts to "sway the affairs" of the company in such a way that it oppresses other shareholders, the court will intervene [119] . It is therefore important to understand that director’s liability should not be limited only to those who are "properly" appointed as directors. Where wrongful conduct which is oppressive to the shareholders has been committed, the court will look for additional and alternative defendants [120] . In the case of nominee director the courts will look at the conduct of the appointer and its relationship with the nominee. It is therefore vital for companies that have nominee directors or those intending to appoint nominees are aware of the consequences of the breach of fiduciary duties and the risk of being exposed.

Any claim against a director of a company has an impact on the company’s affair either in terms of its reputation or financial status [121] . The question therefore is how liable is a nominee director who has breached his fiduciary duty? As noted by Thomas J. in the court of appeal of New Zealand [122] ; "in commercial practice, the relationship of the appointer and the nominee director is almost invariably that of principal and agent or employer and employee. Yet, acting as an agent or employee results in the nominee director being to a greater or lesser extent in breach of the recognized fiduciary duties of director" [123] . The idea that a person can act as an agent and be automatically held liable for an action does not correspond with commercial reality [124] . It is important therefore for legislations to acknowledge the characteristics which define the role of nominee directors.

In Canada the Alberta Business Corporations Act has attempted to acknowledge the role of nominee directors and give special considerations to the interests of their appointing shareholders [125] . Subsection 122 (4) of the said Act states:

" In determining whether a particular transaction or course of action is in the best interest of the corporation, a director, if the director is elected or appointed by the holders of a class or series of shares or by employees or creditors, may give special but not exclusive consideration to the interest of those who elected or appointed the director".

The words "special but not exclusive consideration" was agreed upon so that the purpose of nominee director would not be defined by virtue of their obligations for the company’s interest [126] . Despite being broad and vague the provision provides certain guidance when evaluating the conduct of nominee director in situations where the nominee is acting as agent to the appointing shareholder and therefore was in breach of his fiduciary duties [127] . It is the court who establishes the criteria for "special" and "exclusive" [128] .

This provision however has been argued to be difficult to adopt in other legislations as it would run the risk of diluting the established fiduciary duties owed by a director to a company, principally acting in the best interest of the company [129] . Ensuring that companies are aware of the potential exposure that may happen in the event of breach of fiduciary duties is vital for corporate governance [130] . Such information may discourage certain persons from accepting nominee director roles without proper indemnification from their appointer.

THE USE OF NOMINEE DIRECTOR IN THE OFFSHORE WORLD

As more pressure is placed on onshore authorities to identify and understand the looming secret of the offshore world, there has been a need to investigate the role and duties of nominee directors. The use of nominee director and nominee shareholders in the offshore world is as old as the offshore business itself. [131] Offshore companies use nominee directors as a means to show that they are indeed offshore [132] â€“ that is that the affairs of the company are being managed from an offshore jurisdiction and not from the owners’ country of residence. This is important if tax advantages are to be gained [133] .

Some people appoint nominee in order to escape the administrative hurdles associated with registering an offshore company. [134] However nominee services are not used only for administration purposes. The use of nominee plays