The Nominee Director: Between The Devil and The Deep Blue Sea (Part 2)

In the previous article (Part 1), I have discussed the definition of nominee directors and their duties. To recap, the general rule is that when the company’s interests do not conflict with the interests of the nominator, then the nominee directors may take into account the interest of their nominator. But when the company’s interests conflict with that of the nominators’, the interests of the company come first. 

Now, let’s look into some examples of situations where the nominee directors are caught in between the devil and the deep blue sea. 

EXAMPLES OF SITUATIONS OF CONFLICT

1. To disclose or not to disclose the company’s confidential information to the nominators?

Since nominee directors serve both the interests of the nominators and the company, the reality is that nominee directors are expected to share confidential information obtained from the company with their nominators. Whilst this may not necessarily result in any harm to the company, it does not seem to be in line with the principle of a director’s fiduciary duty between to the company. It is a tricky situation.

In Malaysia, section 218(1)(b) of the Companies Act 2016 expressly states that a director shall not, without the consent or ratification of a general meeting, use any information acquired by virtue of his position as a director of the company to gain, whether directly or indirectly, a benefit for himself or any other person, or cause detriment to the company.

In Australia, Street J in the case of Bennet v. Board of Fire Commissioners of New South Wales (1967) 87 WN pt 1 (NSW) 307 held that if the interests of the company and the nominator attached on such confidential information are not aligned, any disclosure by the nominee director to the nominator may be considered a derelict in his duty. 

Believe it or not, the situation gets more difficult in Canada. In the case of PWA Corp v. Gemini Group Automated Distribution Systems Inc. [1993] O.J. No. 1793 (C.A.), the Court of Appeal for Ontario held that the failure of a nominee director to disclose to the company, information relating to its nominator which is important to the interest of the company amounts to a breach of duty of the nominee director. 

In short, nominee directors cannot disclose the company’s confidential information to the nominators if such disclosure will bring detriment to the company. To be safe, do not disclose any!

2. To contract or not to contract with the nominators? 

The potential conflict in the dual loyalty face by nominee directors can also arise when the company enters into transactions with the nominators; whether to prefer the interest of the company or that of the nominators’. Nevertheless, the general rule applies. 

In Malaysia, such dilemma is cured by section 221 of the Companies Act 2016 which provides for the duty of disclosure by the director of his interests in such commercial transaction. Further, section 222 of Companies Act 2016 prevents the interested nominee director from participating or voting in the meeting deciding on the said commercial transaction. However, section 222 of the Companies Act 2016 does not apply to a private company unless it is a subsidiary of a public company.

3. When the company is insolvent, whose interests take precedence – the company or the nominators (at the same time being the creditors)?

If a company is at the verge of insolvency, the nominee director appointed by the creditors, in my opinion, will definitely be in a situation of conflict, as to whether to advance the company’s interests of the nominators’ (creditors’) interests. In Kinsela v Russell Kinsela Pty Ltd (in liq) [1986] 4 NSWLR 722, Street CJ held that the interest of creditors must be taken into account by the directors when the company is insolvent.

With that being said, the three situations as illustrated above may seem to put nominee directors in a difficult position of conflict but fret not as the law still provides for some leeway to nominee directors. 

EXCEPTIONS TO THE RULE

First, the “corporate primacy approach” recognizes the possibility of acting in a manner that is compatible with the interests of both company and the nominators. In situations where there is no conflict of interests or when both the company’s and the nominators’ interests are aligned, the nominee directors can take into account the interests of the nominators. In Re Broadcasting Station 2GB Pty Ltd. [1964-5] NSWR 1648, Jacobs J believed that a nominee director could, in some circumstances, go so far as to advance the interests of an outside principal, so long as the director believed in good faith that the principal’s interests were consistent with the interests of the company as a whole.

Secondly, nominee directors can avoid breach of duties by seeking protection from the constitution of the company. In Levin v Clark [1962] NSWR 686, it was held that the constitution of the company may allow the nominee directors to act in the interests of the nominators even in situations of conflict. Such an approach is named as the “consent approach”. The consent approach came to light in the case of Whitehouse v Carlton Hotel Pty Ltd [1987] 70 ALR 251 where it was decided that a company with nominee directors may amend its constitution to modify their fiduciary duties.

SPECIAL NOTE TO NOMINATORS

We all know that where a nominee director blindly and ignorantly give effect to the instructions of his nominator and in that process fails to exercise independent judgment and fettered his discretion; he acts in breach of duty.  

At this juncture, I wish to point out that NOT ONLY THAT, a nominator or the officers of a nominating company procuring such breach of that company’s nominee director in another company might actually lead to the nominator or the officer as well as the nominating company be liable for dishonest assistance. In the recent Court of Appeal of the Commonwealth of the Bahamas case of Central Bank of Ecuador & Ors. v Conticorp SA & Ors. [2015] UKPC 11), Lord Mance said:

Acting as an officer of one company, a person may dishonestly procure or assist a breach of duty by the director of another company, in which case such person may make liable for dishonest assistance both himself personally and the company of which he is an officer. Otherwise, individuals acting as officers of a company could never commit any wrong, tortious or equitable.

Hence, should there be any breach of duties; not only that the nominee directors will be liable, the nominators might also be liable!

TO CONCLUDE

Nominee directors face a difficult conflict. They may seem to have been put in an ‘impossible’ position. Notwithstanding that, the law has taken cognizance of the obvious difficulties here and provided some leeway for the nominee directors. All in all, what is important is that nominee directors must exercise reasonable diligence and independent judgment when dealing with the company as well as the nominators. The ideal nominee directors would be the ones who can advance the interests of his nominator and at the same time promote the success of the company. 

Last but not the least; it is imperative for us (be it the company, the nominator as well as the nominee directors) to remember the purposes of the existence of nominee directors, as aptly pointed out by Street J in Bennet v. Board of Fire Commissioners of New South Wales (1967) 87 WN pt 1 (NSW) 307:

The object of providing for interested groups to nominate the members of such a board as this might be said to be threefold: first, one can be confident that an interested group will select a man whose personal qualities and competence equip him for membership; second, it promotes the confidence of that particular group in the board and provides a means of liaison between that group and the board; and third, it ensures that the board, as a single entity, has available in its deliberations the views of all the interested groups.