Feb 2022
A nominee director stands somewhat apart from the other directors by virtue of having been nominated by a shareholder, or other stakeholder of the company, to represent the shareholder’s particular interest. Nominee directors are de jure directors of the companies to whose board they have been appointed. They are not a distinct class of directors and they owe the same duties to the company as other directors, whilst at the same time, representing through expectation of loyalty or legal duty, the interests of the appointer. The difficulty that arises for a nominee director is that in the eyes of the law they are treated like any other director, but there is usually an expectation that they will act with some awareness of their appointer’s interest. This article discusses the role of the nominee director with a particular focus on the English and Cayman Islands legal position.
Directors’ Fiduciary Duties to their Creditors
Fiduciary duties of directors have been codified in the United Kingdom and are now contained in sections 171–177 of the Companies Act 2006 (‘CA 2006’). There is no statutory codification in the Cayman Islands of the general duties, obligations and liabilities owed by directors. The duties are predominately based on the English common law concerning fiduciary duties and duties of skill, care and diligence. English case law is highly persuasive, and the Cayman Courts have adopted the English common law principles relating to directors’ duties A director’s main duty is to act bona fide for the benefit of the company as a whole, however, if the company is in financial difficulty, it has been established under common law that this will also include the interests of the creditors.3
In the case of Kinsela v. Russell Kinsela Pty Ltd (In Liq), Street Chief Justice (CJ), stated that:
Duty of Nominee Directors
A nominee director stands somewhat apart from the other directors, by virtue of having been nominated by a shareholder or other stakeholder of the company to represent the shareholder’s particular interest.12 Nominee directors are de jure directors of the companies to whose board they have been appointed. They are not a distinct class of directors and they owe the same duties to the company as other directors, whilst at the same time, representing through expectation of loyalty or legal duty, the interests of the appointer. Lord Denning in Boulting v. Associations of Cinematograph Technicians13 recognize that a nominee director’s distinct commercial position did not create a deviation from the usual standard of care applicable to company directors.
The difficulty that arises for a nominee director is that in the eyes of the law they are treated like any other director, but there is usually an expectation that they will act with some awareness of their appointer’s interest.
2.1 Conflict of Interest
A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. This rule at the very outset has the potential to put a nominee in a peculiar and uncomfortable situation. This is where legal theory and commercial pragmatism collide in relation to the position of the nominee. Any decision or action of the nominee could be challenged by a perception if nothing else of a conflict of interest by the mere nature of the appointment. Under the common law a director should not put himself in a position where his interest and duty conflicts. Clearly this could put the entire appointment of a nominee director into question from the very outset.
However, the judiciary have accepted the nature of the position of nominee and have instead focused on whether the nominee acted in the best interests of the company, or whether he preferred the interests of his appointer.
2.2 Promote the Success of the Company
Directors have a duty to act for the benefit of the company as a whole and to act in the best interests of the company. Lord Greene Master of the Rolls (MR) in Re Smith & Fawcett determined that it is for the directors and not the court to determine what is in the best interests of the company.14 It is a subjective test. Therefore, in practice, the nominee director is granted some discretion in relation to satisfying the requirement of good faith. However, a director will have failed his duty if no reasonable director could, in good faith, have considered his decision to promote the success of the company, in Re Sourthern Counties Fresh Foods showed that there is an objective element to the director’s discretion.
2.3 Can a Nominee Director Act in the Interests of His Appointer?
The traditional or ‘absolutist’ approach taken by the English courts has been to accept that the nominee directors are a commercial reality and are in a difficult position, but to insist upon them exercising their powers subject to the same duties as other directors without being able to take into account the interests of the appointer. In Kuwait Asia Bank v. National Mutual Life the Privy Council confirmed that in exercising their duties as directors of a company, nominee directors had to ignore the interests and wishes of their appointer.17 The Privy Council reiterated the Scottish Co-Op position that nominee directors owed their duty only to the company and could not take into account the interests of the appointer.
This reasoning has been academically questioned as being too rigid and ignoring the commercial reality faced by nominee directors.18 In Hawkes v. Cuddy, Stanley Burnton LJ emphasized that a nominee director could, without being in breach of his duties to the company, take the interest of his appointer into account, provided that he genuinely considered this to be in the best interests of the company.19 Case law would suggest that a nominee director can take into account the interests of his appointer, however, in the event of a conflict, he must not prefer them over the company.
2.4 Nominee Directors and Insolvency Companies
As discussed above, the interests of the creditors are to be taken into account when a company is in a dangerous, precarious or insolvent financial position. The statement in Kinsela v. Russell Kinsela Pty Ltd (in liq) by Street CJ was affirmed in Colin v. Gwyer v. London Wharf (Limehouse) Ltd, Leslie Cosmin Queen’s Counsel (QC) referred to the Liquidator of West Mercia Safetywear case and said that where a company was insolvent or of doubtful solvency or on theverge of insolvency and the creditor’s money was at risk, the directors, when carrying out their duty to the company, have to consider the interests of the creditors as paramount and take those into account when exercising their discretion
Conclusion
Nominee directors face a challenging position at the outset. They have been described as being caught between the devil and the deep blue sea.22 Clearly on one spectrum they face the commercial reality of their position which requires them to consider the interest of their appointer, yet on the other hand they face their legal obligations to act exclusively in the best interests of the company. English law has begun to accept the impossibility of their position as a conundrum and an area in which commercial reality and legal niceties frequently collide. It now accepts that a nominee director can take account of the interest of their appointers as long as this interest does not conflict with the interest of the company. If a nominee director has been appointed by a secured creditor, his obligation in times of an insolvent position, or a near insolvent position, is to the creditors as a whole. A nominee’s primary obligation will always be to prefer the best interests of the company and any derivation from this in times of insolvency is to recognize that the creditors, as a whole, are in reality the interest of the company as a whole at this juncture. Outside of this it has now been established that it is not a breach of duty if what a nominee director considers the best interests of the company are also to the benefit of the appointer.
1 Cayman Islands News Bureau Limited v. Cohen and Cohen Associated
Limited [1988–1989] CILR 195.
2 Renova Resources Private Equity Limited v. Gilbertson [2009] CILR 268.
3 This position was re-enforced in the English Court of Appeal decision
of BTI 2014 LLC v. Sequane SA [2019] EWCA Civ 112.
4 Kinsela v. Russell Kinsela Pty Ltd (In Liq) [1986] 4NSW:R 722 at 730.
5 Liquidator of West Mercia Safetywear Ltd v. Dodd & Anor [1988] 4 BCC
30.
6 Facia Footwear v. Hinchcliffe [1998] 1 BCLC 218, Walker v. Wimborne
[1976] 137 CLR 1, Nicholson v. Permakraft (NZ) Ltd [1985] 1 NZLR
242, Kinsela v. Russell Kinsela Pty Ltd [1986] 4 NSWLR 722 and West
Mercia Safetywear v. Dodd [1988] BCLC 250.
7 Re MDA Investment Management Ltd [2004] 1 BCLC 217, para. 75.
8 West Mercia Safetywear v. Dodd [1988] BCLC 250.
9 Official Receiver v. Stern [2002] 1 BCLC 119.
10 Colin Gwyer & Associates Ltd v. London Wharf (Limehouse) Ltd [2003] 2
BCLC 153.
11Re Cityspan Ltd [2007] 2 BCLC 522, para. 31.
12 Boulting v. Association of Cinematograph Technicians [1963] 2 QB 606,
626.
13 Ibid., at 10.
14 Re Smith & Fawcett [1942] Ch. 304, 306.
15 Re Southern Counties Fresh Foods [2008] EWHC 2810 (Ch) at 53.
16 Scottish Co-operative Wholesale Society Ltd v. Meyers [1959] AC 324.
17 Kuwait Asia Bank v. National Mutual Life [1991] 1 AC 187.
18 Ahern, Nominee Directors’ Duty to Promote the Success of the Company:
Commercial Pragmatism and Legal Orthodoxy, [2011] LQR 118.
19 Hawkes v. Cuddy [2009] EWCA Civ 219.
20 Levin v. Clark [1962] NSWR 686.
21 Colin v. Gwyer v. London Wharf (Limehouse) Ltd [2002] EWHC 2748 (ch).
22 Parsons, The Director’s Duty of Good Faith, 5 MULR 395 at 418 (1967)
describes the position of the nominee director as being ‘between the
devil and the deep blue sea’.