Nominee Directors: Caught Between The Devil And The Deep Blue Sea

• Published date: 22 April 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Directors and Officers, Insolvency/Bankruptcy, Contracts and Commercial Law, Shareholders
• Law Firm: Conyers
• Author: Ms Róisín Liddy-Murphy

SUMMARY

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.

1 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. In the case of the Cayman Islands News Bureau Limited v. Cohen and Cohen Associated Limited, Harre J listed these duties as 'the observance of general standards of loyalty, good faith and the avoidance of a conflict of duty and self-interest'. ¹ English case law is highly persuasive, and the Cayman Courts have adopted the English common law principles relating to directors' duties.²

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:

In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorize or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent, the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and the directors to deal with the company's assets. It is in a practical sense their assets and not the shareholders' assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration ⁴

Dillon Lord Justice (LJ) in Liquidator of West Mercia Safetywear Ltd v. Dodd & Anor cited with approval the above Kinsela passage.⁵ In West Mercia, it confirmed that directors owe a duty to take into account the interests of creditors in circumstances where the company, and the group of which it was a member, were in a 'very dangerous' or 'parlous' financial position, such that the future of the group probably depended on satisfactory refinancing arrangements becoming available.⁶

In Re MDA Investment Management Ltd it was accepted that the duty arose when the...