The Nominee Director: Between the Devil and the Deep Blue Sea (Part 1)

I don’t want you

But I hate to lose you

You got me in between the devil and the deep blue sea

“Between the Devil and the Deep Blue Sea” is an American popular song published in 1931, with music by Harold Arlen and lyrics by Ted Koehler.

The phrase is also an idiom which means that you are caught in a difficult situation where you have to choose between two equally courses of action, similar to our famous Malay saying “ditelan mati emak, diluah mati bapa” (it is not advisable to Google Translate this literally).

In the context of directors’ duties under the law, directors appointed to represent interests outside of the company would contradict the principle that directors must act in the best interests of the company. Generally speaking, directors should not place themselves in a ‘duty to duty’ conflict situation. 

However, commercial reality recognizes a director who is appointed to represent interests outside of the company, and so does the law. They are known as Nominee Directors.

Defining Nominee Directors

Nominee directors are directors who are appointed to the board of a company by a particular shareholder, group of shareholders, creditors or financial institutions (known as the “nominator”), to represent the interest of the nominator in the said company.

This form of nomination often happens in joint venture companies or in holding companies, where the parent company nominates a person to act as director in order to have board representation in the newly formed company. A nominee director is also frequently appointed to represent the interests of a lender or debenture holder.

Consequently, the nominee director will be acting in the interest of the nominator company by advancing the interest of the joint venture or holding company.

Having to serve two concurrent duties dutifully, which may sometimes be at odds with each other, seems to have caught nominee directors between the devil and the deep blue sea.

Now, it all boils down to this simple question: Which interest should come first; the company’s or the nominator’s?

The Company’s Interest Comes First

Here’s the rule of thumb. Nominee directors may act in the interest of their nominator provided that such act does not conflict with the interest of the company of which they are directors of. In situations where the company’s interest comes in conflict with the nominator’s interest, the former takes precedence.

In Lord Denning’s judgement in the 1958 landmark case of Scottish Co-Operative Wholesale Society Ltd v Meyer and Another [1958] 3 All ER 66 at the House of Lords, his Lordship held as follows:

So long as the interests of all concerned were in harmony, there was no difficulty. The nominee directors could do their duty by both companies without embarrassment. But, so soon as the interests of the two companies were in conflict, the nominee directors were placed in an impossible position.

..

It is plain that, in the circumstances, these three gentlemen could not do their duty by both companies, and they did not do so. They put their duty to the society above their duty to the company in this sense, at least, that they did nothing to defend the interests of the company against the conduct of the society. They probably thought that, “as nominees” of the society, their first duty was to the society. In this they were wrong. 

The decision in Scottish Co-Operative Wholesale Society Ltd placed the position of nominee directors as equal to that of ordinary directors. This decision is consistent with other principles of company law; a company is a separate legal entity and thus, its directors are obligated to act in the best interest of the company. No director, be it a nominee director or otherwise, are to advance sectional interests within the company.

Another noteworthy case in this area of law is the Privy Council case of Kuwait Asia Bank EC v National Mutual Life Nominees [1990] 3 All ER 404 where Lord Lowry at p 423 held:

House and August [the nominee directors] owed three separate duties. They owed in the first place to AICS [the subsidiary] the duty to perform their duties without gross negligence … [the second duty is irrelevant here] … Finally, they owed a duty to their employer, the bank [the parent company], to exercise reasonable diligence and skill in the performance of their duties as directors of AICS … It was in the interests of the bank that House and August should discharge with diligence and skill the duties which they owed to AICS …

In other words, despite the nominee director’s likely partiality towards the nominator, the performance his/her duty as a director of a company is principally harmonious with the keeping of the nominator’s interests until and unless instances of direct conflict arises. Both the positions and duties of a company director and a nominee director can coexist, a view also adopted by the Singapore Court of Appeal in the case of Kumagai Gumi Co Ltd v Zenecon Pte Ltd & Ors And Other Appeals [1995] 2 SLR 297.

An Alternative Perspective

The English Court of Appeal, however, adopted a stricter approach to the duties and obligations of a nominee director. In the case of Hawkes v Cuddy and others; Re Neath Rugby Ltd [2009] 2 BCLC 427, Stanley Burnton LJ held that:

“The fact that a director of a company has been nominated to that office by a shareholder does not, of itself, impose any duty on the director owed to his nominator.”

In the Court’s view, any such duty does not arise out of the nomination but may arise out of a separate agreement or employment relationship between the nominee and nominator. Furthermore, any duty owed to the nominee is deemed not to have detract from directors’ duties that are owed to the company. (Special note: The case of Re Neath Rugby Ltd is still pending appeal.)

Closer to home, Malaysia’s section 217 of the Companies Act 2016 specifically provides for the responsibility of a nominee director (which is in line with the principles as enunciated above), and even took it further to provide for a penal provision for a breach of duty. Section 217 of the Companies Act 2016 reads:

A director who was appointed by virtue of his position as an employee of a company, or who was appointed by or as a representative of a member, employer or debenture holder, shall act in the best interest of the company and in the event of any conflict between his duty to act in the best interest of the company and his duty to his nominator, he shall not subordinate his duty to act in the best interest of the company to his nominator.

A director who contravenes this section commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding five years or a fine not exceeding three million ringgit or to both.

Summary

None have said that being a nominee director is easy. The reality is that nominee directors are constantly faced with an apparent conflict of interests; having to juggle their legal duty to act in the best interest of the company with the commercial expectation of safeguarding the interests of their nominators.

The most important note to take is that, when the company’s interests do not conflict with the interests which the nominee directors represent, then the nominee directors may take into account the interest of their nominator or appointor. In times of conflict of interest, the interests of the company (rather than the nominator) prevails.

At this point, I guess that nominee directors are in the situation as aptly portrayed by Ted Koehler in the last verse of “Between the Devil and the Deep Blue Sea”:

I should hate you

But I guess I love you

You’ve got me in between the devil and the deep blue sea