Scope of nominee directors
02/11/2004 The Star Articles of Law with Bhag Singh
TODAY business is done mainly through the use of
companies formed under the Companies Act 1965. These are recognisable by
reason of the words “Sendirian Berhad” or “Berhad” at the end of their
names.
Of course much business is done through sole
proprietorships and partnerships as well as cooperatives, not to mention
statutory bodies.
Sometimes companies may embark on a big or specialised
project, which requires them to team up with other firms who may offer
skills or finances. Commonly such arrangements are called joint ventures
and very often a separate joint venture company is formed.
When such a company is formed, an employee may represent
the company he works for on the board of directors of the joint venture
company. Such employees may feel honoured by this.
A reader who finds himself in such a situation feels honoured but wants to
know whether there are other implications beyond attending board meetings
and keeping his employer informed.
Indeed there are several matters which a person in such a situation should
be aware of which will enable him to perform his duties correctly as well
as avoid certain situations or at least be aware of them.
A director in such a situation considers himself a nominee for the company
that appointed him to sit on the board of directors of the joint venture
company. This is because he is there by reason of their shareholding in
the joint venture company and not because of his own investment.
However once appointed the person is a director of the joint venture
company which has the result of creating duties in relation to the
company. This is where the possibility of some difficulties arises. When
there is a conflict in whose interest must he act?
This question is better understood in the light of section 132(1) of the
Companies Act 1965 which states that: “A director shall at all times act
honestly and use reasonable diligence in the discharge off the duties of
his office.”
Sometimes it has been said that being a nominee director places a person
in a situation where there is necessarily a conflict of interest. However
not every one agrees with the statement.
The status of a nominee director does not of itself give rise to a
conflict. It is only where a nominee director is found to have voted in
favour of his appointing shareholder to the detriment of the company that
he would be liable for breach of duty. This proposition finds support in
Lord Denning MR’s determination in Boulting vs Association of
Cinematograph Television & Allied Technicians where he states:
“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.”
However the situation alters somewhat if such a director is restricted by
his principal from acting independently and as a matter of fact instructed
to act according to the directions given. Thus in the same case it was
said by the same judge: “But if he is put on 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, or if he agrees to subordinate the
interests of the company to the interests of his patron, it is conduct
oppressive to the other shareholders for which the patron can be brought
to book.”
Yet whilst the law lays down the principle that such a director owes a
duty to the company on whose board of directors he sits in preference to
the company that appointed him, it also at the same time appears to be
contrary to the general prevailing notions and sentiment. This is well
stated by Professor Gower in his Principles of Modern Company Law when he
says:
“To deny a director, openly appointed under the articles to represent a
particular class, the right to think primarily of the interest of that
class, instead of exclusively of the members and creditors as a whole, may
be to defeat the whole object of his appointment.”
Therefore it is necessary for a person who finds himself in such a
situation to consider carefully what is involved and act correctly as a
nominee director.
Another area where attention needs to be paid is if the person is asked to
be a guarantor for credit or loan facilities. Very often the guarantee is
signed as if it is a mere formality.
If a nominee is asked to sign a personal guarantee he should realise that
by doing so he is assuming personal responsibility in a deal in which he
obviously has no personal stake.
He should therefore revert to his principal for instructions and explore
the possibility of having the personal guarantee replaced by a corporate
guarantee.
If this is not possible and the nominee has no choice but to sign the
guarantee, the only option would be to seek an indemnity from the
principal otherwise it may be better not to be a director at all. |
