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 MONEY MATTERS

Who Wants to be a Director?

Being appointed as a director is often seen as a badge of success. But not everyone understands the duties and possible liabilities that go along with the position, writes Howard Bilton

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irectors are employees of a company but they carry added One of the primary reasons for starting a responsibilities and added liabilities as a result. A director has company is to benefit from limited liability. a duty to act in the best interests of the company and for the The shareholders contribute the initial capital benefit of its shareholders. Anything they do in the name of the by paying for their shares at the agreed price. company normally affects the financial health of the company Thereafter they can never be liable for the debts and not themselves, but increasingly directors are being made of the company. Directors are responsible for personally liable for actions which they have undertaken on behalf of the company. the good management of the company but are There is no legal distinction between the duties of an executive and a nonemployees only, so neither share in the profitability executive director. Non-executive directors are generally expected to spend much of the company, except to the extent secured less time on the affairs of the company but they remain equally as liable for the under their contracts, nor are they normally actions of the company as executive directors. responsible for the debts of the company. But in In most countries of the world, including Hong Kong, directors can be cases where the directors have been dishonest or personally liable for the debts of a company, and cannot rely on its liability negligent the courts are increasingly “lifting the protection, if they continue trading and incurring debts on behalf of a company when they knew or It is insufficient for somebody to accept ought to have known that there was little prospect of the company being able to pay those debts. In the position of director – whether paid or Commonwealth Bank of Australia v Frederik Aison unpaid – and fail to get involved or spend & others a non-executive part-time director signed sufficient time on the affairs of the company off on the accounts of a company which were used to solicit loans from the bank. The accounts turned out so that he knows what is going on. Liability to be rather fictitious so the director signing them does land on those who have no intention to was held liable even though it was established that the defraud, mislead or trade whilst insolvent. director did not know the accounts were inaccurate so had not actively misled the bank. The court said he should have known the accounts were inaccurate and should not have signed them without knowing they corporate veil” and making the directors liable were accurate. It was not sufficient defense for him to say that he had been asked to for their actions, or lack of action. Courts do not sign the accounts because the executive directors were away and as a non-executive always allow them to hide behind the limited he could not have known the true financial position of the company. liability status of the company. In a leading Isle of Man case, Agip v Jackson, the directors of a company were Hong Kong is an international financial made personally liable for amounts which had fraudulently passed through the centre and has a large industry devoted to accounts of that company. It was established as fact that they did not know what had setting up companies, offshore or Hong Kong, happened but the court found that liability could be established on the basis of a) for tax mitigation. In most, if not all, offshore actual knowledge, b) willfully failing to take account of the obvious which the court jurisdictions, such as Cayman and BVI, anybody called Nelsonian knowledge – this being a reference to the idea of Nelson deliberately providing corporate services must be licensed failing to see what was in front of him; or c) willfully and recklessly failing to make to do so and are subject to comprehensive such enquiries as an honest and reasonable man would make about the financial and detailed regulations about their conduct. affairs of the company because they may not like the answers they received. St ra n gely enou g h t he le ad i n g on shore Liability will never be avoided by lack of knowledge when knowledge should jurisdictions such as New York, London and have been sought. The job of a non-executive is to ensure they know the business Hong Kong have no regulation of this area. In of the company and provide a check on the executive directors. It is insufficient offshore jurisdictions the authorities have made and always has been for somebody to accept the position of director – whether it clear either by specific regulation or practice paid or unpaid – and fail to get involved or spend sufficient time on the affairs of notes that those who provide directors must be the company so that he knows what is going on. Liability does land on those who knowledgeable in the affairs of the companies have no intention to defraud, mislead or trade whilst insolvent.

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HK Golfer・MAR 2012

HKGOLFER.COM

for which they act and should not delegate their authority by handing out signing powers on bank accounts or giving general powers of attorney to third parties. In Hong Kong it is not uncommon for local accountants, in particular, to set up companies, provide directors and then issue general powers of attorney and broad authorities to others. This allows a third party to do whatever they want in the name of the company without the director’s consent or knowledge. This is complete and utter lunacy. The directors remain liable but have no way of protecting themselves. It is the worst practice. Recently a director of a company was prosecuted under the Hong Kong anti-money laundering legislation. That legislation is onerous. It states that if a person or company (represented by its directors) handles the proceeds of crime – or money which might reasonably be suspected to be the proceeds of crime – then they are liable under this legislation. In this particular instance a company was used to receive money from a UK securities operation. It was alleged that the UK company had engaged in some kind of fraud. It was later found out that no fraud had taken place. The HKMA thought that the director should have suspected that the money going through the company into a bank account over which they had no control was the proceeds of crime. If that was correct the directors were guilty of money laundering. This case highlights yet again that directors will be liable for the actions of the companies under their care and control if that company engages in unlawful activity, even if they have no idea that the company is doing. So make sure that if you are a director you actually direct and know what is going on. In another case from the Cayman Islands (the Weavering case) directors of a Cayman Island investment fund were ordered to pay US$111 million in compensation. The promoter of the fund asked his younger brother and elderly stepfather to act as directors. They were not paid anything. Over the six-year period following their appointment they signed anything put in front of them including minutes of meetings which never took place. They made no attempt to understand or investigate the performance of the fund, the way it was run or the accuracy of accounting materials. In short they did nothing to protect the interests of their shareholders and investors. The court was very clear that where directors do nothing they will generally be found to have intentionally neglected their duties and will thus be liable for any losses suffered. On the other hand directors who make a serious attempt to perform their duties but fail as a result of carelessness or incompetence would generally be relieved from liability by virtue of the standard indemnity contained in the memorandum and articles of association of the company or their contracts of employment or otherwise. The fact that a director is paid nothing or little does not relieve him from the necessity of spending sufficient time on the affairs of the HKGOLFER.COM

In Hong Kong it is not uncommon for local accountants to set up companies, provide directors and then issue general powers of attorney and broad authorities to others. This allows a third party to do whatever they want in the name of the company without the director’s consent or knowledge. This is complete and utter lunacy. company to discharge the supervisory duties. Wood & Another v Holden was a tax case but examined in detail the role and duties of directors. The court went so far as to suggest that a clear indication that a director was not likely to have carried out his duties properly was insufficient pay! It stands to reason that a director, who has no other connection to the company other than this appointment, is unlikely to spend sufficient time and energy supervising the activities of a company if he is not sufficiently well paid to do so. A nominal fee may be sufficient to act a director of a static holding company but surely not for an active company. There is no such thing as a nominee director and references to that position immediately indicates a misunderstanding of the nature of the employment and its liabilities and requirements. So, before you joyfully sign on the dotted line and become a director of any company glowing in the certain knowledge that this recognises your status do think carefully about how you are going to fulfill the obligations of that position.

Howard Bilton is a UK barrister, professor at Thomas Jefferson School of Law in San Diego and chairman of the Sovereign Trust (Hong Kong) Ltd, which specialises in international and offshore tax planning HK Golfer・MAR 2012

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