Group Structures – Risk Of Personal Liability For Directors And Parent Company Liability For Group Companies

A recent decision of the Privy Council, the final court of appeal for Crown Dependencies and British Overseas Territories made up of UK Supreme Court judges and senior Commonwealth judges, highlights the risks for groups of companies where the business of the whole group is managed centrally rather than being devolved to the individual group companies. In this situation, the benefit of limited liability for each company in the group can be lost and both nominee directors of subsidiaries and parent company directors can face personal liability.

The case concerned Conticorp SA, a company based in Ecuador, and Interamerican Asset Management Fund Limited (IAMF), based in the Bahamas and indirectly owned by Conticorp. Mr Taylor was the sole director of IAMF, but acted purely on instructions from Conticorp.

During 1995 and 1996, IAMF transferred substantially all of its assets to Conticorp in return for Conticorp transferring securities in another of its subsidiaries to IAMF. However, the securities transferred to IAMF turned out to be worth much less than the assets it had transferred to Conticorp. At the time of these transactions, the Conticorp group was in financial difficulty, and it seems that this was an attempt to keep assets from the creditors of its subsidiaries.

Liability of the director

Like directors of UK companies, a director of a company in the Bahamas must exercise independent judgment as to what is in the interests of the company. There is nothing wrong with a director being nominated by a shareholder to represent that shareholder's interests, as long as he does not simply act under the shareholder's direction.

Mr Taylor was found to have breached his duties to IAMF by giving effect, blindly and ignorantly, to Conticorp's instructions. He would have breached his duties by doing so even if he was lucky enough to receive only instructions that were in fact in IAMF's best interests. Further, the fact that he was paid only $2,500 per annum for his services as a director did not in any way lessen the duties he owed to the company.

In relation to the transfer of IAMF's assets, it did not matter whether Mr Taylor was aware that the assets were worth more than the securities IAMF received in return: as he had simply followed Conticorp's instructions, he was taken to have the same knowledge about the transaction as those instructing him.

Mr Taylor was therefore personally liable to IAMF for his breach of duty in relation to the transfer...

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